A Reformed CDM including new Mechanisms for - CD4CDM

Perspectives Series 2008 

A Reformed CDM 

– including new Mechanisms for 

Sustainable Development

Perspectives Series 2008 

A Reformed CDM 

– including new Mechanisms 

for Sustainable Development 

Karen Holm Olsen 

Jørgen Fenhann 

Editors 

UNEP Risø Centre

Contents 

Editorial 5 

Karen Holm Olsen, Jørgen Fenhann 

Sustainable development and equity 

Market Mechanisms for Sustainable Development 

in a Post-2012 Climate Regime: 

Implications for the Development Dividend 9 

Deborah Murphy, Aaron Cosbey, John Drexhage 

CDM in Brazil: 

Towards Structural Change for 

Sustainable Development in Some Sectors 23 

Branca Americano 

Legal Influences Perspectives 

from Africa on a Reformed CDM 35 

David Lesolle 

The CDM, ethics and development 47 

Diana Liverman, Emily Boyd 

Institutional reform 

Does the CDM need an institutional reform? 59 

Hans Jürgen Stehr 

A reformed CDM to increase supply: 

Room for action 73 

Benoît Leguet, Ghada Elabed, 

CDM 

Developing Country Financing 

for Developed Country Commitments? 85 

By Søren E. LütkenPh.D 

The Clean Development Mechanism: 

Assessment of Experience and 

Expectations for the Future 101 

DUAN Maosheng

expansion of project categories 

Reforming CDM and Scaling-Up 

Finance for Sustainable Urban Transport 111 

Sergio Sanchez 

scaling Up Energy Efficiency under the CDM 127 

Anne Arquit Niederberger 

scaling up mitigation 

sector No-Lose Targets: 

a New Scaling Up Mechanism For Developing Countries 147 

Murray Ward 

Scaling Up Ghg Emission Reductions 

through Replicable Business Models 163 

Francisco Avendaño 

LULUCF under CDM: 

is there a role or even a future 

in the post-2012 regime? 173 

Marcelo Theoto Rocha

Capacity Development for CDM (CD4CDM) Project 

UNEP Risø Centre, 

Risø National Laboratory for Sustainable Energy 

The Technical University of Denmark 

Box 49 

DK-4000 Roskilde, 

Denmark 

Tel: +45-4632 2288 

Fax: +45-4632 1999 

www.uneprisoe.org 

www.cd4cdm.org 

ISBN 978-87-550-3715-1 

Graphic design: 

Finn Hagen Madsen, Graphic Design 

Copenhagen, Denmark 

Printed by: 

Schultz, Denmark. 

Printed on environmentally friendly paper. 

Disclaimer 

The findings, opinions, interpretations and conclusions expressed in this report are entirely those of the authors and should 

not be attributed in any manner to the UNEP Risø Center, the United Nations Environment Program, the Technical University 

of Denmark, the Netherlands Ministry of Foreign Affairs, nor to the respective organizations of each individual author.

Karen Holm Olsen 

Jørgen Fenhann 

Editors 

UNEP Risø Centre 

Editorial 

Two things can be said about the CDM: it has 

been successful in creating a dynamic carbon 

market, and it can certainly be improved. Since 

the Kyoto Protocol entered into force in 2005, 

the CDM has developed very rapidly, with more 

than 4000 projects in the pipeline and a further 

120 new projects entering the pipeline every 

month. Together, these projects represent a 

cumulative expected total of 2.8 billion tonnes 

of reductions by 2012. In a very short time, the 

CDM has mobilised billions of dollars in public 

and private investment to reduce emissions in 

developing countries. 

In the decade since the Kyoto Protocol was 

established and the CDM conceptualized, it 

has become clear that the world has become a 

very different place. From the warm and tranquil 

beaches of Bali for COP 13 to the COP 14 in a 

much cooler Poland, global awareness of climate 

change has accelerated, along with serious 

concerns about the global economy. It is no small 

irony that a looming global economic slowdown 

could achieve the equivalent of all current 

CDM’s reductions in a fraction of the time, but 

this is evidently not an attractive way to reduce 

emissions. 

At the same time, the CDM has encountered a 

number of challenges and weaknesses, including 

unequal regional distribution of projects, concerns 

about environmental integrity and technology 

transfer, complex governance procedures, and 

questions about the CDM’s contribution to 

sustainable development. 

This edition of Perspectives tries to answer the 

question, “Where to from here?” In other words: 

“How to reform the CDM in a post-2012 climate 

regime?” 

Irony aside, the global economic crisis also 

presents an enormous opportunity to ‘lock in’ 

emission reductions when the global economy 

eventually rebounds. This can only happen, 

however, if global businesses and governments 

pursue very much a “business unusual” approach. 

UNEP’s Executive Director, Achim Steiner, has 

called for a “New Green Deal”, citing “the flip side” 

of the current crisis as the enormous economic, 

social and environmental benefits that are likely 

to arise from combating climate change and reinvesting 

in natural infrastructure, with “benefits 

5 

CD4CDM

anging from new green jobs in clean tech and 

clean energy businesses up to ones in sustainable 

agriculture and conservation-based enterprises”. 

For the CDM, these forces will shape the continuing 

negotiations for a post-2012 climate change agreement. 

Increasingly these negotiations are focused 

on three issues: 

• Deeper emission cuts by all developed 

countries; 

• Adaptation support in least-developed 

countries and small island countries 

that are most vulnerable to climate 

change; and 

• Attracting and enabling greater participation 

by developing countries to reduce 

emissions. 

Following the Bali Action Plan, the CDM and 

adaptation are two major ways to attract the 

participation of developing countries, which 

have agreed to undertake quantifiable emission 

reductions. To achieve this, developed countries 

have agreed to provide the measurable, reportable 

and verifiable technical and financial means 

required. 

The challenge being most discussed now is how to 

build on the existing CDM to create much greater 

participation from developing countries post- 

2012 that can help them transit substantially to 

a development path free from damaging carbon 

emissions. Perhaps the CDM needs to move from 

a project-based level to a sector or programmebased 

level, as suggested by India’s ambassador 

and former climate negotiator, Chandrashekar 

Dasgupta. 

Henry Ford was fond of reminding his staff that 

“everything can be done better than it is”. In this 

spirit, Perspectives explores how the CDM can be 

improved as negotiators prepare for a post-2012 

climate agreement. In these pages, you will find 

diverse insights on reforming and reinforcing 

the CDM in a post-2012 climate regime from 

seventeen leading actors in the rapidly developing 

carbon market. The goal of compiling these views 

is to better inform the decisions of professionals 

and policy-makers in the lead-up to COP 15 in 

Copenhagen and beyond. 

The thirteen papers in this Perspectives raises four 

key issues: 

Sustainable development and equity 

Working for the International Institute for 

Sustainable Development (IISD) in Canada, 

Murphy et al. examine the implications for 

the Development Dividend of four different 

climate-regime options in a post-2012 regime. 

Positioned in the DNA of Brazil, Americano 

asks to what extent the CDM has contributed 

towards transformational change for sustainable 

development in some sectors. Lesolle’s perspective 

from Botswana explores CDM reforms to achieve 

a more equitable geographical distribution of 

CDM projects with benefits for African countries. 

The fourth paper by Liverman and Boyd presents 

ethical and development issues in the CDM from 

an academic perspective in Britain. 

Institutional reform 

Maosheng takes stock of the CDM’s performance 

to date and offers a Chinese perspective on 

expectations for the future, including how 

the CDM can be scaled up to promote its 

current objectives further. Based on personal 

experience as the Chairman of the CDM 

Executive Board for two terms, Stehr analyses 

and discusses the need for an institutional 

reform of the CDM. Lequet and Elabed from 

France ask how procedural changes to the 

existing institutional framework may increase 

the supply of emission reductions. Lütken, a 

6CD4CDM

Dane working for a Dutch company in China, 

proposes ways of dealing with the challenges 

of the prevailing unilateral, developing 

country financing of CDM projects, and the 

lack of technology transfer. 

Expansion of project categories 

Sanchez, from the US-based Clean Air 

Institute, focuses on the transport sector and 

asks how the CDM may be improved for this 

sector, while Niederberger, a senior expert on 

end-use energy efficiency from Switzerland, 

presents a vision for a CDM contributing to a 

global scaling up of energy efficiency. 

Scaling up mitigation 

Sector-no-lose-targets (SNLTs), a possible 

new carbon-market mechanism for scaling 

up investment in low-carbon technology in 

developing countries, is presented by Ward, a 

former negotiator from New Zealand. Rocha, 

a forestry expert in Brazil, asks if there is 

a role to play for land use, land use change 

and forestry (LULUCF) under CDM in a post- 

2012 regime, including options to finance 

reduced emissions from deforestation and 

forest degradation (REDD). Avendaño from 

Peru looks at Programmatic CDM and asks 

how replicable business models from other 

commodity markets can help mature the 

carbon market through management entities 

developing a secondary supply of carbon 

credits. 

The success of the CDM has demonstrated the 

value of carbon markets as one tool to achieve 

internationally agreed political targets, but 

there are still concerns to be addressed and new 

mechanisms for sustainable development to be 

considered. 

Given the increased complexity of a new climate 

agreement, it is likely that a reformed CDM will 

stick to what is desired by almost all Parties − 

increased environmental integrity, simplified 

governance, achievement of sustainable develop 

ment benefits, and flexibility towards programmes 

and policies. A transition towards 

a graduation process, with some of the large 

emitting developing countries moving from being 

eligible for CDM project-hosting to some other 

form of technical and financial support, is being 

discussed in the negotiations. It will probably not 

happen in Copenhagen, but this or other new 

approaches could be built into a review process, 

leaving some of the tough negotiations and 

needed analytical understanding to be worked 

out over time. 

We hope this issue of Perspectives 

contributes to this goal. 

The UNEP Risø Centre Energy 

and Carbon Finance Group 

Introduction 

7 


8CD4CDM

Deborah Murphy, 

Aaron Cosbey 

John Drexhage 

International Institute for 

Sustainable Development 

Market Mechanisms for Sustainable Development 

in a Post-2012 Climate Regime: 

Implications for the 

Development Dividend 

Abstract 

There is broad consensus in the international 

talks on a post-2012 climate change regime 

on the need for some perpetuation of the 

CDM—a market mechanism for sustainable 

development (MMSD). Regime options under 

discussion will impact on the “development 

dividend” of a post-2012 MMSD, affecting 

quality (sustainable development), quantity 

(volume of CERs) and regional distribution. This 

paper examines four regime options—increasing 

the scope of the CDM to include additional 

sectors, differentiation of developing country 

eligibility, expanding the CDM, and a fund-based 

mechanism—and their potential impacts on the 

three elements of the development dividend. 

The nature and scope of the Clean Development 

Mechanism (CDM) is an important consideration 

in the international discussions on a post-2012 

climate change regime. The negotiations have 

taken on increased intensity as negotiators seek 

to finalize a post-2012 regime by COP 15 in 

December 2009. The Bali Action Plan, adopted in 

December 2007, set out broad parameters to guide 

the two-year negotiating process, focusing on 

mitigation, adaptation, technology development 

and transfer, and financing and investment. 

The Plan also emphasized the importance of 

“Various approaches, including opportunities 

for using markets, in order to enhance the costeffectiveness 

of, and to promote, mitigation 

actions, bearing in mind different circumstances 

of developed and developing countries” (United 

Nations Framework Convention on Climate 

Change [UNFCCC], 2007a: 2). The current regime 

employs the CDM and Joint Implementation (JI) 

as market mechanisms, but one can imagine 

a number of different market mechanisms for 

9 


sustainable development (MMSD) that could 

play similar roles. 1 

Discussions at the UN meetings indicate that the 

current CDM could be subject to major changes 

in any post-2012 climate agreement. The Ad 

Hoc Working Group on Further Commitments 

for Annex I Parties under the Kyoto Protocol 

(AWG-KP) is deliberating possible improvements 

to the project-based mechanisms. Key elements 

being explored include broadening the scope of 

the CDM to include other activities (land use, 

land-use change and forestry (LULUCF), carbon 

capture and storage (CCS) and nuclear); and 

expanding the CDM to include sectoral CDM, 

sectoral crediting of emission reductions below 

a previously established no-lose target, and/or 

crediting on the basis of nationally appropriate 

mitigation actions (NAMA). Also under discussion 

are proposals to improve the functioning of 

the CDM, including standardized baselines 

and positive or negative lists of project activity 

types to improve environmental integrity and 

the assessment of additionality; differentiation 

of eligibility of partners; improved access to the 

CDM for least developed countries (LDCs) and 

small island developing states (SIDS); co-benefits 

as a criteria for registration; and multiplication 

factors to increase or decrease Certified 

Emissions Reductions (CERs) issued for specific 

project types. 

Evident from these discussions is that most, if 

not all, UNFCCC Parties envision an important 

role for a CDM-like mechanism in the post- 

2012 regime. Yet there are different views of 

1 In this paper, MMSD describes a market mechanism that can be 

used to achieve the goals of the current CDM as stated in Article 12 of 

the Kyoto Protocol, “to assist Parties not included in Annex I in achieving 

sustainable development and in contributing to the ultimate objective 

of the Convention, and to assist Parties included in Annex I in achieving 

compliance with their quantified emission limitation and reduction commitments.” 

what constitutes an effective and appropriate 

mechanism. Many developed countries are 

interested in an MMSD that provides access 

to low cost credits to meet compliance targets 

under the Kyoto Protocol. But there are growing 

concerns about international offsets, with some 

viewing them as a wealth transfer, arguing that 

the current CDM market does not reflect actual 

reductions in emissions (Victor and Wara, 2008). 

Political sentiment in developed countries 

requires robust additionality processes to ensure 

the environmental integrity of credits under an 

MMSD. Developed countries are also interested 

in an MMSD as a means to engage developing 

countries in efforts to reduce emissions and to 

encourage large emitting countries to go beyond 

the CDM in the post-2012 regime. 

Developing countries see the mechanism as an 

important means for supporting sustainable 

development, and are careful to safeguard 

their sovereign right to define what constitutes 

sustainable development in the national context. 

For most, it includes at least increases in the flow 

of investments, technology transfer and access 

to leading-edge clean technologies. Equity of 

access and the regional distribution of projects 

under the mechanism is particularly a concern 

for LDCs. Developing countries also want an 

MMSD that keeps demand robust. While this is 

dependent on governments reaching agreement 

on further greenhouse gas (GHG) emission 

reduction targets, the structure of the mechanism 

will have a bearing on supply and demand post- 

2012. As well, they are conscious of the fact that 

the integrity of the mechanism will also have an 

impact on demand from Annex I Parties, CERs 

being only one of several options for Annex I 

compliance via trading. 2 

2 Currently, two other market-based mechanisms offer compliance 

units for Annex I Parties: Assigned Amount Units (AAUs) under International 

Emissions Trading (IET) and Emissions Reduction Units (ERUs) 

under JI. 

10 


An effective MMSD in a post-2012 regime will 

need to balance the demands and expectations 

of developed and developing countries, including 

addressing the issues of quality, quantity and 

regional distribution of projects—characteristics 

of the “Development Dividend” (Cosbey et al., 

2005). From a development dividend perspective, 

this means understanding how the future regimes 

could assist in improving: 

• Quality – encouraging stronger sustainable 

development in developing 

countries; 

• Quantity – ensuring access to cost-effective 

CERs that are commensurate with market 

demand, and encouraging large-scale 

investments in transforma-tive sectors 

such as energy and transpor-tation; 

• Regional distribution – increasing 

investment in LDCs and other poor 

developing nations. 3 

The paper examines possible post-2012 regime 

structures, the potential role of the CDM 

or other MMSD within the structures, 

and the implications for the development 

dividend within each regime. To guide the 

analysis, the paper examines four possible 

regime options that are being discussed 

in the international negotiations: 

• Targets with flexibility mechanisms: 

• Differentiation of developing country 

eligibility; 

• Expanded CDM; and 

4 

• Fund-based Mechanism. 

3 IISD’s on-going Development Dividend Project explores what can be 

done to improve the quality, quantity and regional distribution of CDM 

projects. Project information and reports can be found at: http://www. 

iisd.org/climate/global/dividend.asp. 

4 This discussion builds on an earlier IISD paper (Cosbey, Murphy 

and Drexhage, 2007) that surveyed 43 proposed post-2012 regime 

approaches to see what they implied for MMSDs. The 2007 survey also 

looked at technology approaches and concluded that such approaches, in 

and of themselves, do not include a role for an MMSD. Some technology 

actions could incorporate “market-plus” elements, such as carbon offsets; 

In Sections 2 to 5, each of the four options is 

examined, looking at regime characteristics and 

implications for the development dividend. The 

discussion on quality asks what the various regime 

options would mean for an MMSD’s potential 

to contribute to sustainable development. The 

quantity discussion explores the implications of 

the regime options for the volume of CERs in the 

market. The discussion on regional distribution 

Cosbey and Drexhage (2007) argue that 

there will be pressure for major developing 

countries to take actions commensurate 

with their capacity, which could include an 

expansion of Kyoto’s simple two-tiered system. 

assesses the potential impacts of the regime 

options on the share of MMSD investment 

destined for least developed and poorer 

countries. Section 6 provides an overview of the 

four regime options and concluding comments. 

Targets with Flexibility Mechanisms 

A number of proposed post-2012 regimes being 

discussed in the international negotiations 

accommodate the CDM in more or less its current 

form. While many proposals suggest elements 

of improvement and streamlining, the CDM 

remains a project-based mechanism, albeit with 

programmes of activities. It operates within a 

regime that includes emission reduction targets, 

and differentiation between those with targets 

and those without. This is fairly straightforward, 

and currently includes Annex I and non-Annex 

but these are not discussed in this current paper as there is little experience 

with technology credits (aside from sectoral-based approaches, 

which are included under the expanded CDM category). 

Implications for the Development Dividend 

11 


I countries, where the CDM acts as a bridge 

between these two types of groups. 

The AWG-KP discussions include proposals that 

would maintain the basic project-based structure 

of the CDM, but expand the scope to include 

additional eligible project activities, including 

other LULUCF, CCS and nuclear activities 

(UNFCCC, 2008). 

Development Dividend Implications 

Quality - The extent to which the CDM has 

contributed to sustainable development has 

been a major point of contention for many 

stakeholders and some have asserted that the 

CDM has not lived up to expectations in this 

regard. All CDM host countries are required to 

assess projects to ensure that they are compatible 

with their sustainable development objectives. 

And there have been a range of different 

approaches adopted by countries in terms of 

how they screen projects for achievement of 

these objectives. HFC-23 destruction and N 2 

O 

projects are the most contentious in this regard. 

CCS and nuclear projects have the potential to 

generate similar criticisms about their inability 

to contribute to sustainable development, 

and their potential to divert investments from 

renewable and energy efficiency—project areas 

with greater sustainable development benefits. 

There is no guarantee that negotiators will agree 

on including these project sectors in a post-2012 

CDM, but a possible solution for the quality issue, 

while not necessarily ideal, could be the levying 

of a tax on such projects with revenues put 

into a national sustainable development fund. 

This would be similar to systems already taxing 

the proceeds from carbon credit sales such as in 

China, Egypt and Vietnam. Such a solution is unlikely 

to be part of an international agreement 

and action would need to take place unilaterally 

at the country level. 

Also, under discussion is the possibility of including 

co-benefits as criteria for the registration of CDM 

project activities (UNFCCC, 2008), including 

specific sustainable development benefits. The 

prospects of reaching such an agreement are low, 

as developing countries most likely will hold fast 

to their right to define sustainable development. 

Quantity – Modifying the scope of eligible project 

activities has the potential to unlock a huge 

potential supply of credits at low prices. A study 

from the Woods Hole Research Center concluded 

that 94 percent of Amazon deforestation could 

be avoided at a cost of less than US$5 per tonne, 

compared to the US$25-35 per tonne trading 

range of existing CERs (Nepstad, et al., 2007). If 

CDM revenues were available to boost incentives 

in this area, a large amount of cheap credits could 

potentially become available on the market— 

creating concerns of over-supply. This, combined 

with a potential increase in credits from CCS and 

nuclear projects (as well as sectoral credits and 

crediting on the basis of nationally appropriate 

mitigation actions, discussed in Section 4), could 

completely swamp the market. 

Of course, this depends on the broader 

international agreement. If there was agreement 

to limit global average temperature increase to 

2°C compared to pre-industrial levels, the supply 

of CDM credits may not be able to meet demand. 

And political sentiment in developed nations may 

result in less desire for meeting targets through 

international purchases—favoring domestic 

action or other compliance credits—dampening 

demand. 

12 


Regional distribution – A wider scope of LULUCF 

projects could encourage broader participation 

in the CDM. There is huge potential in non-Annex 

I countries for LULUCF projects in addition 

to afforestation and reforestation—such as 

improved agriculture, reducing the unsustainable 

use of biomass energy, revegetation, and reducing 

emissions from deforestation and degradation 

(REDD). 5 Indeed, Schlamadinger’s (2007) research 

determined that a broader LULUCF scope could 

help ensure a more regional distribution of CDM 

projects, especially for Africa. It is the position 

of the African Group that REDD should be 

considered under the project-based mechanisms 

to help improve regional equity; and the LDC 

negotiating group has called for a broadening to 

LULUCF activities to allow greater access for LDCs 

to the CDM (Third World Network, 2008a: 3). 

In regard to broadening the scope to include 

CCS and nuclear, there is some concern that 

such projects would continue to benefit the 

larger, more economically-advanced developing 

nations. The UNEP-Risoe Centre’s (2008) 

CDM pipeline indicates that the top three host 

countries—China, India and Brazil—host over 

70 percent of approved CDM projects and will 

generate three-quarters of all CERs by 2012. 

Differentiation of Developing 

Country Eligibility 

The international negotiations include a highly 

contentious discussion of possible graduation 

of some non-Annex I Parties to a state of 

target- or action-based commitments. Arguing 

for differentiation in the August 2008 Accra 

5 Other approaches to REDD financing are also being discussed in the 

negotiations, including a market-linked system whereby a dedicated REDD 

trading mechanism is established and a non-market approach where 

a small proportion of international emission allowances would be sold 

to developed countries with the revenues going into a fund to support 

REDD efforts in developing countries. 

discussions, Australia noted that 45 developing 

countries have a GDP per capita higher than 

that of Ukraine which is an Annex I country— 

including South Korea, Qatar, Bahrain, Saudi 

Arabia, Singapore, Bahamas—suggesting that 

this be an indicator for differentiation (Third 

World Network, 2008b). Cosbey and Drexhage 

(2007) argue that there will be pressure for 

major developing countries to take actions 

commensurate with their capacity, which could 

include an expansion of Kyoto’s simple two-tiered 

system. Most (but not all) developing nations, on 

the other hand, argue that the only differentiation 

under the Convention and the Bali Action Plan is 

the differentiated response between developed 

and developing countries under the principle 

of common but differentiated responsibilities, 

including the historical responsibilities of the 

developed countries for GHG emissions. 

Approaches that favour graduation of some 

non-Annex I countries will have perhaps the 

most interesting impacts on the function of any 

MMSD. An option would be to involve the major 

developing country Parties with targets in IET and 

JI-like mechanisms, perhaps providing incentives 

for developing country participation by allowing 

these countries to receive large amounts of surplus 

allowances. There could be a separate scaled-down 

version of the current CDM for those countries 

without targets. There are disincentives (discussed 

below) for developing countries to pursue such a 

negotiated outcome, perhaps surmountable by 

the granting of large surplus allowances matched 

by tough Annex I targets. 


Quality – With selective differentiation, the 

CDM would probably become more oriented to 

development than mitigation, serving the needs 


13 


of lesser developed countries and comprising a 

portfolio of projects that achieve high development 

dividends. 

While the CDM is explicitly aimed at fostering 

sustainable development in the host countries, 

IET and JI have no such explicit aim. If the starting 

point is the need for an MMSD focused on both 

low-cost emissions and sustainable development, 

then one option would be to “green” AAUs in a 

development-friendly manner, or to amend the JI 

to include sustainable development requirements 

(i.e., the requirement for host country approval on 

sustainable development grounds). This could be 

made effective exclusively for developing country 

hosts, or more broadly for all host countries. 

On the other hand, it can be argued that 

JI implicitly includes an imperative to foster 

sustainable development, or at least to serve 

national interests according to some definition. 

If a JI project offered no development dividend, 

there would be no reason for a host country to 

allow it, given that any ERUs it produced would 

result in increases to the host’s emission reduction 

commitment. In fact, since some percentage of 

JI projects will inevitably be non-additional, the 

ancillary benefits of the project roster as a whole 

will have to be seen by the host to be sufficient 

to more than balance out the resulting effective 

increases in its assigned amount. 

One implication of a JI as a replacement for the 

CDM is that such a regime would shift the burden 

for determining additionality away from the 

international level and toward the national (to 

the extent that the new mechanism functioned 

like Track 1 JI). That is, at the global level the JI 

mechanism does not allow for a net reduction in 

emission reduction commitments, so only the host 

state needs to be concerned about additionality. 

This would greatly simplify the international 

administrative machinery as compared to the CDM, 

but it might also result in inefficient duplication 

of similar efforts at each national level. 

Any regime that incorporated such a mechanism, 

of course, would have to account for the 

fundamental differences between this and 

the existing narrow CDM. From a developing 

country perspective, the existing CDM is a more 

or less unblemished good, bringing as it does a 

measure of development dividend without any 

attendant obligations. A JI-type mechanism that 

covered developing countries would still bring 

those sorts of benefits to host countries, but 

would take place in the context of host country 

obligations to reduce emissions, and would see all 

credits accruing to the investor’s home country, 

counting toward its reduction commitment. In 

effect, this requires the host country to give up 

low hanging fruit for the emissions reduction 

benefit of others. As such, developing countries 

would presumably need to be compensated in 

the design of the regime for losing the CDM. 

Quantity – A regime with selective differentiation 

means that the market will not experience the 

large volumes of credits as seen from the major 

CDM players. The major developing countries 

are by and far the main suppliers of CERs up to 

2012. If, for example, we removed China from the 

market, the number of projects in the current 

CDM pipeline would be reduced by 36 percent 

and the number of CERs by 2012 would drop 

fully by 54 percent (UNEP-Risoe Centre, 2008). 

This shortfall might be made up to some extent 

by broadening the scope of the CDM, and some 

developed countries may turn to ERUs or AAUs 

to meet compliance targets. 

14 


Regional distribution - Differentiation could 

impact on the regional and equitable distribution 

of projects. As countries graduate from the CDM, 

a greater share of the market will be open to LDCs. 

At present, regional distribution is very unequal 

with Latin America & the Caribbean and Asia & 

Pacific together accounting for over 95 percent 

of CDM projects and just under 95 percent of 

CERs. LDCs account for 28 projects in the CDM 

pipeline—less than 1 percent of the projects 

and 1 percent of the CERs (UNEP-Risoe Centre, 

2008). Of course there is no guarantee that 

the funds that formerly flowed to large targets 

of CDM finance would actually be redirected to 

CDM in smaller countries. Investment tends to 

flow to the best available opportunities, and if the 

barriers to CDM investment in those countries 

are high enough, the market might simply shrink, 

rather than redistribute. In fact such an effect is 

practically guaranteed—the question is simply 

how significant it would be. 

Expanded CDM 

An expanded CDM or a broader MMSD, which 

seeks to overcome perceived constraints of the 

current project-based approach by resort to policy 

or sectoral approaches, is also a topic in the post- 

2012 negotiations. The international discussions 

have narrowed the focus to include sectoral 

CDM for emission reductions below a baseline 

defined at a sectoral level; sectoral crediting 

of emissions reductions below a previously 

established no-lose target; and crediting on the 

basis of NAMA. While the existing architecture 

of the CDM would need to be modified to 

accommodate these proposals—technical issues 

such as baselines, monitoring and verification, 

and institutional issues such as working through 

the Executive Board could build on the current 

CDM framework. 

There is considerable interest in sectoral crediting 

mechanisms, but the various formulations, to 

greater or lesser degrees, are subject to serious 

limitations. A primary difficulty is that there are 

not many sectors that would be amenable to 

sectoral crediting; it demands a small number 

of coordinated large emitters. For both sectoral 

and NAMA crediting mechanisms, baseline 

determination is plagued with fundamental 

The major developing countries are by and far 

the main suppliers of CERs up to 2012. If, for 

example, we removed China from the market, 

the number of projects in the current CDM 

pipeline would be reduced by 36 percent and 

the number of CERs by 2012 would drop fully 

by 54 percent (UNEP-Risoe Centre, 2008). 

difficulties, there is no easy way to determine 

additionality, and it is difficult to get around the 

problem of punishing first movers by crediting 

only those that moved after the implementation 

of a sectoral crediting or crediting on the basis 

of NAMA. Baron and Ellis (2006) argue that the 

difficulties of coordinating sectoral crediting 

mechanisms across a number of linked domestic 

and regional trading systems would probably 

prove insurmountable; and the same could hold 

true for credits based on NAMA. 


Quality - The potential for an expanded CDM 

to contribute to sustainable development is 

obvious. Sectoral CDM could be employed to 

exploit the win-win opportunities in sectors such 

as deforestation, energy and transportation, all 


15 


of which have enormous development linkages. 

Crediting on the basis of NAMA offers countries 

a more strategic and integrated mechanism, 

encouraging linkages with national development 

policies and encouraging project activity in 

such sectors as energy efficiency, renewable 

energy and transportation—sectors that tend to 

generate higher development dividends. 

Quantity - Sectoral CDM holds potential for an 

enormous amount of GHG mitigation, on a scale 

that far outpaces the current project-by-project 

formulation of the CDM (Bosi and Ellis, 2005). 

Thus, an expanded CDM may give rise to the 

concerns discussed above in Section 2 about 

flooding the market for compliance units. One 

of the key benefits that many see in the prospect 

of an expanded CDM is its ability to deliver large 

quantities of GHG reductions as compared to the 

current bottom-up approach. But the question 

is whether the resulting flow of CERs would in 

fact find buyers, or to what extent the price of 

CERs would reach disastrous lows. Baumert and 

Winkler (2005) have argued that the expanded 

version of the CDM would vastly increase the 

potential for generating credits, perhaps well 

beyond what the market would bear in terms of 

demand. The analysis above cited projections of 

demand for all Kyoto compliance mechanisms— 

not just CERs—of between 1.6 and 2.5 GT by 

2012. On the supply side, very conservative 

estimates indicated potential for policy CDM to 

yield at least 3.6 GT of annual CO 2 

e reductions 

by 2030 (Cosbey, Murphy and Drexhage, 2007: 

14). 

An expanded CDM has clear potential to reduce 

GHG emissions at a higher order of magnitude 

than the narrow version. This may be good news 

for buyers, but only up to a point. If the market 

becomes swamped it will crash, with values for 

CERs coming in at well below what proponents 

projected, potentially leading to widespread 

abandonment of project-based initiatives. One 

clear implication for a regime that includes 

an expanded CDM is the need for ambitious 

reduction targets that will fuel demand for the 

additional CERs that may be brought on line, 

though the expanding voluntary market may pick 

up some of any excess supply. 

Regional distribution – Sectoral CDM would be 

likely to start in the more advanced developing 

nations, because they are more likely to have 

a large industrial base, and have worked with 

existing sectoral initiatives such as the Cement 

Sustainability Initiative. Crediting on the basis of 

NAMA would also likely favour the more advanced 

developing nations, continuing the pattern of 

uneven regional distribution of projects. There 

are proposals that recognize this imbalance, with 

South Korea suggesting that a share of proceeds 

from the revenue of NAMA credits be allocated 

to support LDCs and Small Island Developing 

States (Republic of Korea, 2008). 

Fund-based Mechanism 

Financing is an explicit part of the Bali Action 

Plan and the negotiations include discussion of 

the types of institutional innovation that might 

support the necessary financial transfers from 

developed to developing countries. . There could 

be potential for linking some of the transfers 

to specific sustainable development attributes 

by associating the support with a fund-based 

mechanism. 

The original proposal from Brazil that led to the 

creation of the CDM was for a clean development 

fund, endowed by Annex I countries, which would 

support sustainable development in developing 

countries in ways that also achieved mitigation. 

As well, Mexico (2008) recently proposed a 

16 


Green Fund that would support such activities, 

though the resulting emissions reductions would 

not be used to offset emissions in developed 

countries. A fund-based mechanism based on 

these conceptions is discussed here because 

it is unique among the options described; it 

can operate within and outside a regime of 

internationally agreed targets. 

A fund-based mechanism could have a scope 

similar to the CDM, and would consist of 

mandatory contributions from UNFCCC Parties, 

the nature and extent of the contributions being 

a matter of international negotiations. In the end 

there are a number of ways that contributions 

could be assessed. The Mexican proposal calls 

for basing contributions on an index composed 

of GHG emissions (present and historic, absolute 

and per-capita), GDP and population. 

This fund would then be used to purchase 

emission reduction credits from GHG-reducing 

projects, policies or programs in developing 

countries. If the Fund operated under a regime 

with targets, the credits involved could be used 

to retire obligations of the funders, assigned in 

proportion to contributions. If it operated under 

a regime without targets, it would be considered 

a straight funding mechanism, similar to the 

Mexican proposal, able to fulfill developed 

countries’ Article 4.3 UNFCCC obligations to 

cover the incremental costs of addressing climate 

change in developing countries. 6 In contrast to the 

“with targets” Fund, such a scheme would result 

in net global mitigation of GHG emissions. 

There are a number of ways in which the Fund 

could disperse its resources, but primary among 

the design considerations would be a desire to 

harness the ingenuity and energy of the private 

sector, as does the existing CDM. One possibility 

would be a reverse auction arrangement, whereby 

project proponents would commit to delivering 

credits for agreed prices, and would bid against 

each other in competition for contracts. Under 

this scenario, contracts would be awarded to the 

lowest bidder that satisfied the methodological 

requirements (such as additionality), and the 

bidding would stop when the budget tranche for 

a particular time period had been exhausted. 7 

Inevitably there would be projects for which 

the terms of the contract were unfulfilled, for 

example because the project failed to receive 

project funding. The unused funds from such 

projects could simply be rolled back into the 

next tranche of funding. 


Quality – A fund-based mechanism could be 

structured to explicitly direct financial transfers 

to sustainable development priorities. There may 

need to be a specific definition for sustainable 

development under the fund, i.e., the project 

meets an agreed list of minimal sustainable 

development benefits or is ranked on a point 

system. A funding mechanism could also be 

combined with a more traditional type of MMSD, 

in a pairing that had the fund focusing more 

explicitly on sustainable development and the 

more traditional mechanism focusing on sheer 

volume. 

6 If the Fund operated in this mode, there is no reason why it could 

not welcome non-governmental “voluntary market” investors as well, in 

a scheme that could simultaneously give that market the credibility it 

needed, and provide important extra funding for mitigation and sustainable 

development in developing countries. 

7 One advantage to such a process is that it would eliminate some of 

the huge producer surplus generated by the current system. In a reverse 

auction it is highly unlikely, for example, that HFC projects with costs as 

low as US$1/tonne would fetch the kinds of prices they are currently 

fetching in the carbon market. 


17 


Quantity – Could a fund supported entirely by 

governments foster the same volume of GHG 

reduction units as could a market mechanism, 

such as the current CDM, that relies extensively 

on private investment? While no hard data exists 

for the magnitude of CDM investment, UNFCCC 

(2007b) estimates that there was US$7 billion 

invested as a result of the CDM projects that were 

registered in 2006—a figure that is probably well 

below the capacity of a reformed CDM to deliver 

in the post-2012 context. To give an indication of 

the magnitude of that flow relative to the kind of 

flows made available by governments for the same 

sorts of purposes, note that the total funding 

for the most recent four-year replenishment 

for the Global Environment Facility averaged 

out to about US$0.8 billion per year. Of this, 

it disburses about US$250 million per year on 

mitigation-related activities. Another standard 

for comparison is provided by the recently 

established and highly publicized World Bank 

Climate Investment Funds (part of which will be 

devoted to adaptation funding), which combined 

are targeted to reach US$5 billion over 3 years, 

or US$1.7 billion per annum. 

In light of these standards, there might be cause 

for concern in relying only on a governmentsupported 

fund to support mitigation efforts. It 

would certainly be a challenge to raise the kind 

of money needed to even replace the private 

sector investment that currently goes into the 

CDM, much less the potential investment under 

a reformed and broadened CDM. The recent 

economic downturn suggests that it may be a 

difficult time to generate significant new funds 

in many developed countries, particularly if 

these funds are perceived to support investment 

in major developing countries, such as China, 

with its rising economic power. 

Regional distribution – A fund-based mechanism 

may be the most suited to equitable regional 

distribution, whereby a portion of the funding 

can be allocated to LDCs. The percentage of 

funding allocated to poorer countries would 

need to be carefully considered. While it may 

be true that the major developing countries 

account for the majority of CDM investment, it is 

also true that they also account for the majority 

of population, GDP and energy use among 

developing countries. A weighted distribution 

of funding using, for example, an average of 

population-deflated and GDP-deflated figures, 

could help to determine an equitable distribution 

of funds. 8 Of course, capacity building to set up 

an enabling environment for climate mitigation 

investment will be needed in many LDCs. 

Conclusion 

There is uncertainty about the long-term 

nature of the carbon market, but there is broad 

consensus in the international talks on a post- 

2012 climate change regime on the need for 

some perpetuation of the CDM—a market 

mechanism for sustainable development. 

Emissions trading will likely form an important 

cornerstone of future action on climate change, 

and the CDM or other MMSD with a strong focus 

on cost efficiency and flexibility is important 

to businesses seeking credits for compliance. 

And such a mechanism can help developing 

countries encourage sustainable development 

and contribute to the objective of the UNFCCC 

to reduce GHG emissions, consistent with the 

goal of Article 12 of the Kyoto Protocol. 

The structure of the post-2012 regime will have 

a strong influence on the development dividend. 

8 See Cosbey (2006: 26-29) for a discussion of weighted regional 

distribution of CDM projects. 

18 


If developed country concerns of access to 

reasonably priced quality credits are met and 

there is meaningful participation by developing 

countries, especially the large emitters of China, 

India and Brazil, there likely will be high demand 

for these credits. 9 If these concerns are not met 

and the sustainable development benefits of 

CDM projects are questionable, there could be 

strong political pressure in developed countries 

to undertake domestic emission reductions, 

weakening the market for credits under the 

CDM. 

in the current pipeline are from such countries. 

There are, however, options to increase the 

supply of CERs, such as broadening the scope 

of and expanding the CDM. Under such regimes 

the main consideration would be the volume of 

credits potentially issued and the subsequent 

impacts on the carbon market. Absent ambitious 

Annex I targets, the high volumes generated 

might have the potential to increase the supply 

of CERs to the point where the market might be 

swamped. In such a case there may be potential 

Four possible post-2012 regime options and the 

implications for the development dividend within 

each approach have been examined in this paper. 

As noted in Table 1, a fund-based mechanism 

is best able to address the issues of quality 

and regional distribution because it can be 

structured to explicitly direct financial transfers 

to sustainable development priorities and LDCs. 

But it will be challenging, and likely impossible, 

to get agreement on a level of funding similar to 

that expected to flow through an MMSD. A regime 

with graduation criteria could create a greater 

market share for LDCs, but there is no guarantee 

that investment will flow to these countries. A 

wider scope for LULUCF projects also could 

benefit LDCs, but considerable capacity building 

would likely be needed to create conditions to 

attract investment. LULUCF projects also offer 

considerable promise for generating SD benefits; 

as does expanding the CDM to include crediting 

on the basis of NAMA and sectoral CDM. 

In regard to quantity, if the more advanced 

developing nations take on targets, the CDM 

market will see massive reduction in volumes 

supplied since the majority of projects and CERs 

Key elements being explored include 

broadening the scope of the CDM to include 

other activities (land use, land-use change 

and forestry (LULUCF), carbon capture and 

storage (CCS) and nuclear); and expanding 

the CDM to include sectoral CDM, sectoral 

crediting of emission reductions below a 

previously established no-lose target, and/ 

or crediting on the basis of nationally 

appropriate mitigation actions (NAMA). 

for CERs to sell on the as-yet-nascent voluntary 

market. Without increases in demand, prices 

might hit destructively low levels under some of 

the broadened and expanded CDM scenarios. 

It is important to note that the more attractive 

an MMSD becomes in a post-2012 regime, 

other things being equal, the less incentive any 

developing country has to take on targets that 

entail lost access to the mechanism. 10 If the post- 

9 Of course, as noted above, if “meaningful participation” takes the 

form of developing country targets, the CDM as it is currently configured 

will not operate. 

10 The assumption of other things being equal is important. It is of 

course possible to imagine a regime such as those described in Section 3, 

involving targets for all, emissions trading, with tough enough developed 


19 


Table 1: Development dividend impacts of post-2012 approaches under discussion in the international negotiations 

Approach 

Regime Characteristics 


Quality Quantity Regional Distribution 

Targets with 

Emission reduction 

LULUCF projects offer 

Broadening scope 

Wider scope of LU- 

flexibility 

targets 

considerable SD benefits 

could unlock huge 

LUCF projects could 

mechanisms – 

Differentiation of 

Projects with question- 

potential supply of 

encourage broader 

broadening the 

those with targets 

able SD benefits could 

credits, perhaps be- 

participation, including 

scope 

and those without 

be included (e.g., CCS, 

yond what the market 

LDCs, CCS and nu- 

nuclear) 

can bear in the absence 

clear projects likely to 

of ambitious targets in 

benefit more advanced 

developedcountries 

develoing nations 

Differentiation 


IET and JI have no aim to 

Market will not experi- 

Greater share of market 

of develop- 

targets 

foster SD; options are to 

ence large volume of 

open to LDCs, but no 

ing country 


green AAUs or amend JI 

CERs (as the main sup- 

guarantee that CDM 

eligibility 


to include SD require- 

pliers of credits up to 

funds will be redirected 


ments 

2012—more advanced 

to these countries 

Graduation criteria 

CDM could be more 

developing countries— 

for developing 

oriented to serving the 

will graduate 

countries 

SD needs of lesser developed 

countries 

Expanded CDM 


Sectoral CDM could 

Vastly increased poten- 

Sectoral CDM and 

targets 

exploit development 

tial for CERs, perhaps 

crediting on the basis 


linkages in such sectors 

beyond what the 

of NAMA would benefit 


as deforestation, energy 

market can bear in the 

the more advanced 


and transportation 

absence of ambitious 

developing countries, 

Crediting on the basis 

targets in developed 

continuing the pattern 

of NAMA offers linkages 

countries 

of uneven regional 

with national develop- 

distribution 

ment priorities and activities 

in high SD areas. 

Fund-based 

Could operate 

Fund structure could 

Challenging for a 

Most suited to equita- 

mechanism 

within and outside 

explicitly direct financial 

government-supported 

ble regional distribu- 

a regime of inter- 

transfers to SD priorities 

fund to replace the 

tion, whereby a portion 

nationally agreed 

level of private sector 

of funding can be 

targets 

investment that goes 

allocated to LDCs 

into the CDM 

20 


2012 regime includes a radically expanded MMSD 

that covers sectoral and NAMA initiatives, it is 

offering governments the opportunity to fund 

a variety of policies and programmes that they 

might have as current priorities, but for which 

they lack the requisite resources. This clearly 

counts as a more attractive MMSD. 

Given the broad desire for some sort of MMSD 

in the post-2012 regime, it is important to 

understand the significance of the various 

possible regimes on the shape of an MMSD. This 

paper takes a first step in this direction, providing 

policy makers with a deeper understanding of 

the development dividend implications (quality, 

quantity and regional distribution) of various 

MMSDs. 

Deborah Murphy works with the International Institute for 

Sustainable Development (IISD) with the Climate Change and 

Energy Program. Her work on climate change is focused on 

market mechanisms, technology, the post-2012 climate change 

regime, governance, and more fully exploring the links between 

climate change and sectoral policies. 

Contact: dmurphy@iisd.ca 

Aaron Cosbey manages the Trade and Climate Change 

Programme with the International Institute for Sustainable 

Development (IISD). He is a development economist and has 

served as advisor and consultant to a number of governments 

and intergovernmental organizations. 

Contact: acosbey@iisd.ca 

John Drexhage is Director of the Climate Change and 

Energy Program of the International Institute for Sustainable 

Development (IISD). He has extensive experience in climate 

change and energy, including periods as a domestic advisor and 

international negotiator on climate change, followed by work as 

an expert analyst and manager for IISD. 

Contact: jdrexhage@iisd.ca 

References 

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Gas Mitigation: Institutional and Operational Issues. OECD 

Environment Directorate and International Energy Agency. COM/ENV/ 

EPOC/IEA/SLT(2006)4. 

Baumert, K. A. and H. Winkler, 2005. “Sustainable Development Policies 

and Measures and International Climate Agreements.” In Bradley, Rob, 

Kevin A. Baumert et al., Growing in the Greenhouse: Protecting the Climate 

by Putting Development First. Washington, D. C.: World Resources 

Institute. pp. 15-23. 

Bosi, M. and J. Ellis, 2005. Exploring Options for “Sectoral Crediting 

Mechanisms.” Paris: OECD Environment Directorate and International 

Energy Agency. COM/ENV/EPOC/IEA/SLT(2005)1. 

Cosbey, A., 2006. “Defining and Measuring the Development Dividend.” 

Making Development Work in the CDM: Phase II of the Development 

Dividend Project. pre-publication version. Winnipeg: IISD. 

Cosbey, A. and J. Drexhage, 2007. Advancing Development Goals in a 

Sustainable Manner: Options and Implications for Post-2012 International 

Climate Change Efforts. A Way Forward Working Paper #1. Winnipeg: 

International Institute for Sustainable Development. 

Cosbey, A., D. Murphy and J. Drexhage, 2007. Market Mechanisms for 

Sustainable Development: How do they fit in the various post-2012 

climate efforts? Winnipeg: IISD. 

Cosbey, A., J. Parry, J. Borwen, Y.D. Babu, P. Bhandari, J. Drexhage and D, 

Murphy, 2005. Realizing the Development Dividend: Making the CDM 

Work in Developing Countries. Winnipeg: IISD. 

Mexico, 2008. Submission by Mexico. Submission to the third session of 

the Ad Hoc Working Group on Long-term Cooperative Action under the 

Convention. . 

Nepstad, D., B. Soares-Filho, F. Merry, P. Moutinho, M. Bowman, S. 

Schwartzman, O. Almeida and S. Rivero, 2007. The Costs and Benefits of 

Reducing Carbon Emissions from Deforestation and Forest Degradation in 

the Brazilian Amazon. Falmouth, MA: Woods Hole Research Center. 

Republic of Korea, 2008. Market-based Post-2012 Climate Regime: Carbon 

Credit for NAMAs. Submission to the third session of the Ad Hoc 

Working Group on Long-term Cooperative Action under the Convention. 

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Schlamadinger, B., 2007. “Post-2012 eligibility of land-use and bioenergy 

activities in the CDM.” Presented at Annex I Expert Group Seminar with 

Developing Countries: Working Together to Respond to Climate Change, 

19-20 March 2007, Paris. 

Third World Network, 2008a. “Accept ambitious reduction targets, Annex 

I told at Kyoto group meeting.” TWN Accra News Update 2. 22 August. 

Penang, Malaysia: Third World Network. 

Third World Network, 2008b. “North floats idea of new climate regime, 

South warns this threatens Copenhagen outcome.” TWN Accra News 

Update 9. Penang, Malaysia: Third World Network. 

UNEP-Risoe Centre, 2008. CDM Pipeline Overview. September 1 st , 2008 

version. . 

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CMP 3. December 2007. . 

UNFCCC, 2007b. Investment and financial flows to address climate change. 

Bonn: UNFCCC 

UNFCCC, 2008. Emissions trading and the project-based mechanisms: 

Draft conclusions proposed by the Chair. Ad Hoc Working Group on 

Further Commitments for Annex I Parties under the Kyoto Protocol. Sixth 

Session, Accra, 21-27 August 2008 and Poznan, 1-10 December 2008. 

FCCC/KP/AWG/2008/L.12, 27 August. 

Wara, M. and D. Victor, 2008. A Realistic Policy on International Carbon 

Offsets. PESD Working Paper #74. Palo Alto, CA: Stanford University. 

country targets and generous enough allowances for developing countries 

to overcome the disadvantage of losing the CDM as a mechanism. 


21 


22 


Branca Americano 

Designated National 

Authority (DNA) Brazil 

CDM in Brazil: 

Towards Structural Change 

for Sustainable Development 

in Some Sectors 

Abstract 

In this article, experience with CDM in Brazil 

is analysed in terms of its capacity to promote 

long-term benefits in the direction of a lowcarbon 

economy. For this purpose, a set of 280 

projects, including projects at the validation 

stage and approved projects, are categorized 

according to project type and analysed using 

two criteria: the number of projects in each 

category, and emission reductions. For each of 

the categories – landfill gas, N 2 

O from industry, 

hydro-power plants, biogas from pig farms and 

bagasse – the sector and/or technology is briefly 

described and how the CDM project activity has 

impacted and transformed the sector analysed. 

As everyone knows CDM is a mechanism with very 

particular characteristics. It has an important 

economic basis, and the intention is to optimize 

resource allocation and minimize costs for emission 

reductions while contributing to the sustainable 

development of host countries. Nevertheless the 

mechanism as it is in real life is the result of hard 

negotiations and a possible consensus among 189 

Parties. Its final design is not completely rational 

or optimized, and many people who did not follow 

the negotiations have difficulties in understanding 

some of its characteristics. 

The two main concepts on which the mechanism 

is based are the concepts of additionality and its 

contribution to sustainable development. Both 

concepts are as complex as the mechanism itself. 

Sustainable development is up to each country to 

define and so is not objective or comparable as a 

concept. Additionality is also a difficult concept 

23 


ecause of the underlying notion of a baseline. 

It is difficult to establish without a doubt what is 

the baseline scenario and to what extent the CDM 

makes the difference when deciding to pursue a 

particular project activity. It is also difficult to 

determine to what extent the CDM, which most 

of the time makes only a marginal contribution, 

has a definitive role in pushing the balance in the 

direction of implementing the project activity. 

Nevertheless it is unquestionable that the CDM is 

a success and has introduced structural changes 

in some sectors in some countries. 

In this article I will analyse the CDM in Brazil. 

First, I will discuss the concept of sustainable 

development in the Brazilian context. Then I will 

analyse the evolution of the CDM in the country 

since the beginning of 2004, including projects 

that are in the pipeline awaiting validation. 

Then I will analyse some of the main types of 

projects to assess how they have changed their 

own sectors and how they have contributed to 

sustainable development in some aspects. The 

analysis is based on my experience of working in 

the executive secretariat of the Brazilian DNA, as 

well as on interviews with project developers and 

sectoral stakeholders. 

Sustainable Development in Brazil 

The Brazilian DNA is the Interministerial Comission 

on Climate Change (CIMGC) consisting of 11 

Ministries which meet once every second month 

to analyse projects and assess its contribution 

to sustainable development. Project proponents 

have to prepare a document, known as “Annex 

III”, in which the contribution of the project 

activity under five different aspects or headings 

must be explained. These five headings are: 1) 

contribution to local environmental sustainability; 

2) contribution to the improvement of labour 

conditions and net job creation; 3) contribution 

to the distribution of income; 4) contribution to 

training and technological development; and 5) 

contribution to regional integration and linkages 

with other sectors. There is no threshold for any 

of these five aspects or headings, nor any kind 

of indicator for any of them, nor any measure 

for all the aspects of sustainable development. 

The DNA takes into account the project itself 

based on the document, which explains the 

contribution to sustainable development (Annex 

III) and takes into consideration the whole 

picture. In many cases the CIMGC requests 

additional information and clarification about 

the contribution envisaged to some of the 

sustainable development aspects described by 

the project proponent. The purpose is to make 

clear in the document the aims of the project 

proponents, who must make Annex III available 

to local stakeholders during consultation in the 

validation period. The document also remains on 

the Brazilian CDM homepage after the project 

has been registered. Making Annex III public, 

with a clear statement of how the project activity 

contributes to sustainable development, to some 

extent constrains the project proponents to 

comply with its promises. As it is well known, the 

letter of approval (LoA) is requested only once, 

at the moment of registration of the project 

activity. At this time, the host country issues a 

LoA stating that the project contributes to the 

sustainable development, though most often 

based on projects that are not yet in place, so that 

many of the aspects cannot be checked before 

registration. They consist of promises such as 

job creation, benefits for local communities, 

etc. However, there is no monitoring of the 

contribution to sustainable development. The 

control that the DNA has after issuance of the 

LoA is very limited. If the project does not comply 

with the country legislation, it is very easy to stop 

the activity using domestic law. However, if other 

aspects, like the number of new jobs created, are 

24 


not in place as promised in Annex III, nothing 

can be done about it. In this regard, having 

Annex III publicly available and associated with 

the PDD in the Brazilian homepage is one way to 

ensure that promises are kept. It is important to 

mention that Parties can always request a review 

of projects at the moment of the registration 

and issuance of CERs if they wish. In addition, 

Brazil has the ability to cancel and/or revoke the 

LoA. This possibility is based on the fact that the 

LoA is an administrative act and hence can be 

cancelled or revoked. Article 2 of Resolution 4 

states that if, after the issuance of the LoA, new 

information comes to light providing evidence of 

illegal acts or acts contrary to the public interest, 

the Commission may cancel or revoke the LoA, 

provided all procedures for the exercise of the 

right of defence are followed. This ultimate 

resource can be used in very special cases. The 

idea is not to use it as a common procedure, 

i.e. as an administrative procedure, but rather 

as a political one in extreme situations. 

Besides these aspects of sustainable development 

adopted by the Brazilian DNA, this 

paper will consider another aspect, namely 

the capacity to promote long-term benefits in the 

direction of a low-carbon economy. The idea is to 

assess to what extent a type of project introduces 

long-term benefits to sustainable development 

beyond those of each individual project. In this 

paper I will elaborate on the ability of a type of 

CDM project to introduce structural changes, that 

is, to promote clean and renewable technologies 

which point clearly to decarbonization of the 

production and consumption patterns on a 

sustainable and long-term basis. 

CDM projects in Brazil 

Brazil was once a pioneer in the CDM. The 

country was the first to have its methodology 

approved and the second to register a project, 

and for some years it was leading all the indicators 

for CDM projects. It is evident that, due to Brazil 

having a very low carbon-intensive energy matrix, 

India and China immediately took the lead in 

the process. Nevertheless Brazil still has a high 

potential for CDM projects. The main comparative 

advantage is that we have an important 

institutional structure for the CDM already in 

place: project developers, financing institutions, 

DOEs and DNA with great experience. This is an 

important distinguishing feature compared to 

However, there is no monitoring of the 

contribution to sustainable development. 

The control that the DNA has after 

issuance of the LoA is very limited. 

other countries because it allows stakeholders 

to identity CDM opportunities in the country. 

Currently many changes can be identified in the 

profile of CDM in Brazil. The main objective of 

this article is to identify what kinds of projects 

have contributed to structural changes in some 

sectors and how. 

To assess evolution over time, projects are 

identified by the starting date of comments. This 

mode of reference was chosen because it allows 

a comparison of all projects in the pipeline, 

including those which are not yet registered. 

Projects which were rejected were excluded from 

the analysis. The database used comes from the 

Towards Structural Change for Sustainable Development in Some Sectors 

25 


pipeline produced by Jørgen Fenhann, UNEP 

Risø Centre, version dated 11 June 2008. Thus 

the 2008 figures cover less than six months. 

The assembly taken into account in this analysis 

considers 280 project activities with expected 

reductions of 176,987 ktCO2 until 2012. In terms 

of power, installed capacity is 5958 MW. Many 

different types of project have been implemented 

since 2004, but it is possible to identify types 

of project that predominate in terms of both 

quantity and emissions reductions. The following 

table brings together the main types of project 

that have been implemented in Brazil. 

After identifying the cluster of projects that are 

significant in terms of number and emissions 

reductions, the project categories will be analysed 

and attempts made to identify their contribution 

to sustainable development. One particular 

concern is the contribution to changing the 

carbon intensity of a sector. 

Landfill gas project activities 

The situation in the country regarding the 

disposal of solid waste is very precarious. From 

a total of 228,413 tonnes of solid waste collected 

daily in Brazil in 2000, only 36% ended up in a 

sanitary landfill.1 Almost the same quantity goes 

to controlled landfill sites, and the remaining 

solid waste is deposited in open dumps. A very 

small proportion goes to other destinations such 

as composting plants and incineration. There 

is no legislation to enforce the burning off of 

the biogas in the landfill. The practice is only to 

combust for security reasons to avoid accidental 

explosions and sometimes to reduce offensive 

smells. 

1 IBGE statistics http://www.ibge.gov.br/home/estatistica/populacao/ 

condicaodevida/pnsb/lixo_coletado/lixo_coletado110.shtm 

Figure 1 – Cluster of Projects Analysed 

26 


This kind of project activity captures the landfill 

gas and flares it, sometimes producing electricity 

and/or heat. Some other uses are possible, for 

example, a new project in the pipeline proposes 

to use the biogas as an input to an industrial 

plant to produce renewable methanol. 

In general, the contribution of such projects 

is very clear in terms of local environmental 

sustainability and improvements in labour 

conditions. The situation of open dumps is 

precarious regarding the environmental aspects 

(air and water quality) and labour aspects. It is 

also clear that these projects introduce both new 

technologies and new practices and mentalities 

into the waste sector. For the first time, solid 

waste, which is considered a big problem for 

municipalities, is seen as a possible source of 

revenue. It is interesting to note that a lawsuit 

has been introduced questioning the right of 

exploration of some sanitary landfills. The waste, 

which was seen as an ambient liability, is now 

considered an additional financial resource, 

which stakeholders are disputing the right to 

explore. For the moment this source of revenue 

is completely dependent on CERs, but other uses 

such as energy generation are being explored 

and in the future may become sustainable. The 

possibility of managing landfills as an economic 

resource independent of CDM is not foreseen at 

the moment. 

The 28 landfill gas projects in Brazil, which 

represent 11% of the project activities in the 

pipeline, will contribute 30% of expected CERs 

until 2012. It is interesting to note that the first 

five projects approved in Brazil were landfill gas 

projects. The methodology is well established, and 

since the end of 2004, ACM0001 has been used 

in most projects. This stability and continuity 

in methodology has an important comparative 

advantage regarding other types of project. 

On the other hand, only towns with significant 

populations may have landfills big enough to 

justify a CDM project activity. In general, project 

proponents set the minimum population size of 

a region with a landfill for a CDM project at over 

100,000 inhabitants. The design of traditional 

CDM methodologies is highly adapted to this 

kind of project, which has a great potential to 

develop CDM projects in all big landfill sites 

in Brazil. Many municipalities are interested 

in developing CDM projects to construct and 

explore landfills, with the prospect of creating a 

sanitary revolution in urban areas. The Ministry 

of the Cities has structured a pilot programme to 

construct landfills which have not yet succeeded 

in creating incentives for municipalities with a 

total population of more than 180,000 residents. 

One problem identified for this kind of project 

is that it is very sensible from the political 

point of view, as it involves different political 

interests. Possible further improvements would 

be not to flare the biogas but always to generate 

electricity, heat or any other possible use of it. 

An important barrier to be overcome is the size 

limit on landfills. A new stage to be reached is 

to extend the collection and use of biogas to 

smaller landfills, which could be achieved with 

programmatic CDM. 

N 2 

O Projects 

These projects are not important in terms of 

number (five projects, one adipic acid and four 

nitric acid). Nevertheless they are important in 

terms of emission reductions (21%) because of 

the high GWP of the N 2 

O, namely 3102 for CDM 

purposes. It also has limited possibilities for 

expansion because of the limited number of plants 

in the country. The great benefit of this kind of 

2 GWP values from the IPCC Second Assessment Report (SAR) for 

1995 are the ones adopted in the Kyoto Protocol. 

CER Pricing: Legal Influences 

27 


project is in terms of its emissions reductions. 

The benefits in term of sustainable development 

are limited. Many of these projects state in 

“Annex III”, describing the contribution of the 

project activity to sustainable development, that 

they will use some of the financial benefits from 

the CERs for environmental and social projects 

within the region of the plant. The contribution 

in terms of structural changes is limited, and for 

that reason it will not be analysed in the context 

of this article. 

Hydro-power plants 

Installed capacity in Brazil is more than 100 GW. 

Of this total, 76% comes from hydropower plants 

and only 2% from small hydropower plants.3 The 

CDM was a great incentive for this kind of project. 

Sixty-one small hydropower plants proposed have 

been as CDM projects in Brazil, representing 

22% of the project activities in the pipeline. 

These projects are contributing with 14% of the 

expected CERs until 2012. The contribution in 

terms of sustainable development is evident. 

The government is also concerned to encourage 

this type of project. The incentive programme 

for renewable sources of electricity (PROINFA) 

was first established in 2002 and revised in 

2004. Its objective is to provide incentives for 

wind, biomass and small hydropower plants. The 

Development Bank (BNDES) may finance 70% of 

the investment, and Eletrobrás guarantees prices 

for some of the energy. The additionality of 

projects that benefit from the PROINFA incentive 

is not questioned, as this type of incentive, 

defined as policy type –E4, is considered in the 

baseline scenario. In the Proinfa decree, which 

3 Under Brazilian regulations, small hydropower plants are those with 

between 1 MW and 30MW of installed capacity. 

4 EB16 Annex 3 / Clarifications on the treatment of national and/or 

sectoral policies and regulations (paragraph 45 (e) of the CDM Modalities 

and Procedures) in determining a baseline scenario. 

makes reference to its voluntary contribution to 

the mitigation of climate change, Eletrobrás is 

appointed the owner of possible CERs generated 

by CDM projects using PROINFA incentives. 

However, many projects which benefit from 

PROINFA were developed by private initiative 

without the participation of Eletrobrás as 

project participant. This has generated different 

interpretations regarding entitlement to CERs, 

and many project proponents are awaiting a 

resolution of this problem before proposing 

new activities in this sector. At present, projects 

that might apply for Proinfa incentives are going 

instead for the CDM exclusively. 

Emissions reductions from this type of project are 

real and measurable and contribute in the long 

term to reducing emissions because the life-time 

of a small hydropower project is 50 to 70 years. On 

the other hand, it is very difficult to assess to what 

extent the CDM was really the main factor driving 

the investment decision. This kind of investment 

has a high risk, and all incentives to reduce 

the risk are welcome. CDM is just one of them. 

How decisive the CDM is in making investment 

decisions in particular projects is also difficult to 

assess. The additionality tool is not sufficient to 

assess the complexity of this kind of investment 

decision. Even if it is difficult to assure with total 

certainty that one small hydropower plant would 

not have been constructed without CDM, there 

is a consensus that CDM had a positive impact 

in terms of increasing the number of investors 

interested in small hydropower plants. 

Biogas: pigs 

These projects consist, in general, in changing the 

treatment of animal waste management systems 

(AWMS). Currently, pig waste is flushed from the 

barns and treated through sequential anaerobic 

lagoon management. The project activity consists 

28 


of covering the lagoons, collecting the biogas and 

combusting it. Some of these projects use the 

biogas to produce heat and/or electricity. This 

has many evident local environmental benefits 

because it reduces the risk of underground water 

contamination, bad smells and the pathogenic 

vectors associated with animal manure. It also 

improves the quality of pig manure as fertilizer. In 

general people who live in the area and work on 

the farms are very positive about the project and 

very cooperative with regard to the management 

of the system. 

The additionality of this kind of project is very 

clear. In most of them, the only monetary benefit 

comes from the CERs. There are 47 projects in this 

category in Brazil, but most of them are bundles 

of small-scale projects and have already covered 

more than 250 farms. In terms of emissions 

reductions, these projects will contribute 8% of 

the expected CERs until 2012. 

Even though this kind of project is very positive 

and represents tremendous opportunities in 

Brazil, it has faced many problems. It was first 

developed using methodology AM0016, which 

was put on hold at the 24 EB meeting. This 

methodology did not include monitoring of 

flares, and estimates of emissions reductions 

were not conservative. When it was replaced by 

ACM0010, many projects could not adapt because 

of the higher costs associated with the high risk 

of the activity, which reduced their economic 

viability. Projects using methodology AM0016 

were concentrated in the second half of 2005 

and then stopped. A second wave of pig projects 

started in 2006 and were developed using the 

small-scale methodology AMS III.D. In 2007 very 

few projects of this kind started validation. 

Most of these projects consisted of bundling many 

farms in just one PDD. The project proponents 

are generally companies with their main business 

in the development and management of CDM 

project activities. They developed the project 

and proposed it to a number of farms, mostly 

organized in cooperatives or associations. For 

the farm owners, the benefits are reductions in 

local environmental impacts and having the heat 

and/or energy to be used on the farm. Project 

developers assume all the costs and risks and are 

the owners of the CERs. In some projects, farmers 

earn a small part of the CERs. These projects face 

some additional difficulties because farms can 

Nevertheless it is unquestionable that the CDM 

is a success and has introduced structural 

changes in some sectors in some countries. 

be very far away from each other and operational 

costs and logistics are complicated. At present 

not many project developers are interested in 

developing this kind of project due to all these 

hurdles. 

How the prospect of developing Programmatic 

CDM will impact on this kind of project is not 

clear. Programmatic CDM allows an unlimited 

and continuous addition of project activities 

(CPA), replicating the first one after approving 

the umbrella project (PoA). The idea is very 

interesting because it allows costs to be reduced 

and some projects to be scaled up, thus reducing 

the bureaucracy. However, other problems, like 

the reaction of the DOEs in assuming their role, 

are delaying the adoption of this new modality for 

CDM. A big pig-product company is developing 

a Programmatic CDM in Brazil. The advantage 

in terms of adding farms continuously is clear, 

but the overall perception is that the marketing 

associated with the trade mark was also important 

in the decision to go forward with this project. 


29 


This will probably be the first Programmatic 

CDM to be analysed in the Brazilian DNA. 

In terms of the capacity to modify practices in 

the sector, it is clear that this practice is being 

incorporated as part of the modernization of 

these farms. There is an important gap between 

the traditional practices in low-intensity capital 

family farms and modern farms with high levels 

of technology. The technology for the use of 

biogas is not feasible for small farms. One great 

challenge is to extend this practice to smaller 

farms. The impact in the long term is positive. It 

is interesting to note that workers on the farms 

have a great interest in maintaining the systems 

that have already been embedded because they 

bring great advantages in terms of working 

conditions. The challenge is to interest farmers 

in the secondary benefits of using biogas, like 

the electricity, heat and fertilizers that could be 

produced, as well as the attractiveness of a better 

local environment, even if the business is very 

marginal in terms of the core business. 

Bagasse 

This kind of project activity consists in increasing 

the steam efficiency of a bagasse cogeneration 

facility and supplying the electricity surplus 

to the grid. This avoids dispatching the same 

amount of energy, which is part fossil. There 

are 51 bagasse cogeneration projects in the 

pipeline, contributing 6% of expected CERs 

until 2012. Most of them use large-scale 

methodologies. Until 2005 the methodology 

used was AM0015, but from 2006 onward the 

consolidated methodology ACM0006 was used 

in association with ACM0002. This stability of 

the methodologies available is very positive for 

the development of projects. 

The current situation is that bagasse is used 

for cogeneration in very inefficient facilities, 

and no electricity is supplied to the grid. The 

high potential for energy production from the 

sugarcane industry was repeatedly pointed out 

in many studies on the energy sector. However, 

this potential was never utilized. There are many 

reasons for this. First of all, bagasse is abundant, 

and if it remains on the field it represents an 

environmental problem. Burning it in a very 

inefficient way is convenient because the costs 

are low. This consumes a lot of bagasse and 

generates sufficient electricity and heat for 

the sugarcane industry. The ability to supply 

energy to the grid was made possible in the new 

regulations for the electricity sector, but it was 

not sufficient for the sector to move on in this 

direction. There are many reasons for this. The 

main reason is that producing electricity is not 

the sector’s core business. Energy production 

could represent 1% or 2% of the core business, 

namely the production of sugar and/or ethanol. 

Investment in high-efficient boilers and turbogenerators 

is not required in order to continue 

or increase the production of sugar or/and 

ethanol. Producers are not interested in going 

into another business (energy). They would need 

to supply energy on a regular basis and to comply 

with many technical specifications for a sector 

with a different logic and behaviour than in the 

agro-industry. It would imply significant changes 

for a marginal gain with many risks. Only after 

CDM did the sugarcane industry start to supply 

electricity to the grid. This is unequivocal. 

The contribution to sustainable development, 

as stated in Annex III of the PDDs, is associated 

rather with the particular industry as a whole 

and cannot be associated directly with the 

project activity. Usually the industries which 

adhere to the CDM have better practices in 

terms of benefits to employees and their families, 

30 


working conditions, etc. Some PDDs state that 

some of the CERs will revert to local projects in 

the social area. But in the long term, the main 

contribution relates to the use of a by-product 

as an energy source. As everyone knows, Brazil 

has a very low carbon intensive energy matrix 

and electricity generation is based mainly on 

hydropower sources. What is interesting is that 

the dry season coincides with the sugarcane 

harvest season, which permits a very convenient 

complementarity. During the dry season the 

level of the water in the reservoirs has to be 

controlled, and this is the period when thermopower 

plants are dispatched more frequently. 

This complementarity is positive because it 

reduces emissions from fossil fuels and enhances 

the stability of the Brazilian electricity system 

by adding firm energy to the system. As UNICA, 

the Brazilian Sugarcane Industry Association, 

states, the potential for power generation with 

bagasse in 2020 is 15,214 MW. Adding straw to 

the bagasse, the potential reaches 28,758 MW. So 

this kind of project still has a great potential as 

CDM project activity. 

Projects which generate 

electricity for the grid 

Many types of project generate electricity for the 

grid (Figure 2) or replace the energy supplied by 

the grid. From a total of 280 project activities, 148 

generate electricity with an installed capacity of 

5958 MW and emissions reductions of 81,867 t 

CO2 until 2012. Some of these have been dealt 

with in previous sections, like hydro-power and 

bagasse CDM projects, but some others, like windpower 

plants or solar energy, were not addressed 

because they are not numerous. It is important to 

understand why these projects are not numerous 

and how CDM could play an important role in 

preventing increases in the carbon intensity of 

the Brazilian energy matrix. 

The main source of electricity generation in 

Brazil is hydropower plants. This makes the 

emissions factor for the grid very low compared 

to other host countries like India and China, with 

a mainly coal-based matrix. Nevertheless 149 

projects, more than 50% per cent of the projects 

in the pipeline, are for producing electricity. 

Most of these projects use ACM0002 or AMS ID, 

which have the same rationale for calculating 

the emissions factor. The rationale behind the 

methodology, which estimates the emissions 

factor for an electricity system, is not adequate 

for a country like Brazil, which has very low 

operating margins because of the huge number 

of hydropower plants (low cost must run) 

generating electricity in the base. The build 

margin, which takes into account the most 

recently constructed power plants, responsible 

for 20% of the electricity generation in the 

system, does not reflect what is happening in 

the energy auctions. Only thermo power plants 

can offer the minimum price and hence win the 

auction and get constructed. Renewables go to 

the auction but do not win. Calculated in this 

Figure 2 –CDM project activities generating electricity 


31 


way, the build margin emissions factor is very low 

for Brazil and does not represent an incentive for 

renewable projects. To give an idea, I will present 

the results from the last two auctions realized on 

September 2008 to decide which plants will start 

to generate electricity to the interconnected 

system. In the first auction (1,935.39 MW), all the 

plants that win the bid were fossil fuel: ten fuel-oil 

plants and two natural-gas plants. In the second 

bid (5,566 MW), 24 plants were (contracted?), 

of which 17 were fuel-oil plants, four natural gas 

and one coal. Only two renewable plants were 

contracted: one bagasse and one hydropower 

plant. 

The CDM has had a great impact in 

Brazil. It has been a fabulous showroom of 

possible new practices in the country, like 

landfills with vegetation and birds, pig farms 

producing heat electricity, and fertilizers 

without bad smells using all sorts of biomass 

by-products to produce electricity, etc. 

The trend is very clear: of the installed capacity of 

101,520 MW, only 21% represents thermo power 

plants. Of the plants which are in construction 

(7,643 MW), 25% are thermo, and of those which 

have not started construction yet (26,981 MW), 

45% are thermal power plants. 

As demonstrated, Brazil has very clean electricity, 

but this reality is changing. The way in which 

ACM0002 or the “tool to calculate the emissions 

factor for an electricity system” is calculating 

the emissions factor in order to quantify the 

emissions reductions of CDM projects captures 

the inertia of the system instead of looking ahead 

and identifying the trend. CDM should be an 

incentive to reverse this scenario of increasing 

carbon intensity. Unfortunately this is not the 

case for the Brazilian electricity matrix. 

Another difficulty is related to the definition 

of the electrical system for the grid and the 

emissions factors associated with this definition, 

which have changed in the country. Initially 

projects used the simple adjusted method for the 

operating margin and used a definition for the 

grid by gathering the south and the southeast/ 

central regions into only one grid. Most of the 

projects that added power to the grid are located 

in the southeast region. When the Dispatch 

Centre started to calculate the emissions factor 

by means of the dispatch analysis, another 

grid definition was used, which is the common 

definition used by the dispatch analysis in 

its commercial contracts. Finally, a study was 

performed by the Dispatch Centre together 

with the Ministry of Mines and Energy and the 

Ministry of Science and Technology by applying 

the criteria proposed in the “Tool to calculate 

the emission factor for an electricity system” to 

the Brazilian electricity system. After this study, 

for the purpose of the CDM, the Brazilian grid 

was defined as only one system. What are the 

consequences of these definitions? As most coal 

power plants are in the South, the emissions 

factor taking the South into account becomes 

higher. But in fact, as the country is highly 

interconnected, it does not matter where the 

energy is produced for the logic of the dispatch. 

In terms of sustainable development, it is highly 

significant that there is only one emissions 

factor for the country. This will create incentives 

for many projects that otherwise would not be 

carried out, and the energy will be available for 

the whole country because of the increasing 

interconnection. Now, for example, there will 

be greater incentives for wind-power projects 

32 


in the Northeast of the country, which has great 

unused potential, and the previous baseline 

emissions factor for the region was almost zero. 

This new baseline emissions factor associated 

with Programmatic CDM may help to disseminate 

many technologies. For example, the use of 

electric showers is very common in Brazil, which 

produces two demand peaks during the day and 

increase the need for firm energy. The use of 

solar heaters, which is almost inexistent, could 

be a real benefit for the country. 

Finally, the projects in the pipeline that have 

been analysed in this paper do not yet reflect 

the new emissions factors, which are lower than 

the previous ones for some regions (South and 

Southeast/Center) but are higher for others 

(North and Northeast), which coincidentally are 

the less developed areas in the country. 

Final Remarks 

The CDM has had a great impact in Brazil. 

It has been a fabulous showroom of possible 

new practices in the country, like landfills with 

vegetation and birds, pig farms producing heat 

electricity, and fertilizers without bad smells 

using all sorts of biomass by-products to produce 

electricity, etc. In terms of structural changes, 

which allow the new practices that have been 

introduced to become common practice, the 

impacts differ greatly from sector to sector, but 

in general projects would not survive without the 

CDM. More research is needed to understand and 

explain the overall dynamic and driving forces in 

each sector/technology. The main aspect of the 

CDM was to call the attention of the production 

sector to the fact that from now on climate 

change is an important aspect to be taken into 

account. The perception that this new constraint 

can also be transformed into a new business 

opportunity allowing the country to grow in a 

more sustainable way was very important. This 

change in mentality and the perception of new 

opportunities in some sectors are the main 

achievements. Two main deceptions remain. As 

all over the world, no small-scale projects for 

poor communities are being developed in Brazil 

and almost no project activities in afforestation 

and reforestation. Probably CDM is not the 

best mechanism to develop these kinds of 

projects. Now in Brazil the public sector, like 

municipalities, ministries and agencies, is very 

interested in developing Programmatic CDM in 

many of these areas which have not yet been 

covered by the CDM projects, like reforestation, 

public transportation, energy efficiency, etc. 

There is an enormous need for development 

in the country. Climate change must not be a 

limitation for development and eradication of 

poverty. Rather, it will be an opportunity for a 

sustainable development, which is viable in the 

long term, efficient, fair and with low carbon 

intensity. The process is just beginning. 

Branca AMERICANO has worked since 1998 at the Coordination 

on Global Climate Change of the Brazilian Ministry of Science and 

Technology, which is also the Executive Secretariat of the Brazilian 

DNA. She has participated in the IPCC-EFDB Steering Group 

and is a negotiator in the Brazilian delegation to the UNFCCC. 

Contact: branca.americano@gmail.com 


33 


34 


David Lesolle 

DNA in Botswana 

Perspectives from Africa on 

a Reformed CDM 

Abstract 

The Clean Development Mechanism (CDM) has 

proved to be a success in generating projects 

to address the greenhouse gas emissions that 

would otherwise have occurred in developing 

countries. Despite Africa’s growing participation 

in the carbon market, African projects accounted 

for about 4% of CDM projects by mid-2008 

(UNFCCC website, August 2008). Based on 

the above assessment, there is a need for a 

special approach to CDM to ensure that Africa’s 

participation is enhanced. The regional differences 

and geographical distribution identify capacity and 

experience as key drivers for the low performance 

by the rest of Africa. The countries that have 

attained some level of sustainable development 

are those that are likely to benefit from CDM, 

namely South Africa and North Africa. The 

paper examines what needs to happen to reform 

CDM to benefit Africa: institutional reforms, 

management systems and capacity-building. 

Africa and the Clean 

Development Mechanism 

Since the Kyoto Protocol became fully operational 

in 2005, the Clean Development Mechanism 

has become a multi-billion dollar source of 

funding for sustainable development. In his 

address to the 13 th Conference of the Parties to 

the United Nations Framework Convention on 

Climate Change (UNFCCC) in Nairobi in 2007, 

the Secretary General of the UN, Ban Kii Moon, 

identified the mechanism as an ‘outstanding 

example of a UN-led partnership linking 

government action to the private sector in the 

developing world’. 

35 


Table 1: Countries with CDM projects in Africa - by number 

and scale (expressed as thousands of certified emission reduction 

(kCER) expected in 2012). 

on sustainable development, especially if CDM 

project activities are to become popular in 

Africa. The problem with CDM so far is that it 

has forgotten about sustainable development 

and tends to award prominence to mitigation 

and emissions reduction. 

CDM project activities are sparsely distributed 

across Africa (Table 2). In most cases, the lack of 

CDM activity is closely tied to the level of awareness 

of the role-players – the DNA, the private 

sector and the civil-society movement on climate 

change issues in general. 

Challenges leading to low levels 

of CDM Activity in Africa 

Source: UNEP Risø CDM Pipeline 1 September 2008. www.pipeline.org 

Since then, the numbers show a rather slower 

pace of movement for Africa (see Table 1). The 

experience of African countries has been a steep 

learning curve. The opportunities are there, and, 

as we go into the fourth review of the Global 

Environmental Facility (GEF), there will be a need 

to ensure that Africa’s specific circumstances are 

addressed. For this to happen, African negotiators 

must prepare themselves to engage with partners, 

developed countries and in some cases countries 

belonging to the G77 and China group. 

Unequal geographical distribution 

of CDM Projects for Africa 

Though the number of African countries with 

DNAs is high compared to other regions such as 

the Asia/Pacific, the number of projects is not 

encouraging. Most African DNAs see CDM as an 

opportunity to drive sustainable development. 

It is in this regard that the focus needs to be 

The review of a number of initial national 

communications submitted to the secretariat 

established that (see UNFCCC website): 

• For many parties, the issue of climate change 

was new to them, as was their efforts in 

education, training and public awareness. 

• Unavailability of experts and limited financial 

resources has caused difficulties in organizing 

materials for education, training and public 

awareness. 

• The integration of climate change issues 

into educational curricula was recognized as 

crucial for the future. 

• Minimal awareness and education on climate 

change issues among the public at large, 

NGOs and policy-makers. 

• Many parties indicated that, in order to address 

climate change issues in a multidisciplinary 

and efficient way, they would require 

additional financial and technical resources 

to develop and train a critical mass of human 

resources in inventories, vulnerability and 

adaptation. 

• The scope of training on climate change 

issues should be widened, to include data 

36 


Table 2 

Region KP parties Parties with DNA Parties with project experience Parties with registered projects 

Annex 1 parties (AI) 38 28 n/a* 17 

NAI-Africa (NAI-AFR) 47 37 16 7 

NAI-Asia and the Pacific (NAI-ASP) 49 34 28 21 

NAI-Latin America and the Caribbean 

(NAI-LAC) 

32 26 19 19 

NAI-Other 7 8 6 3 

UNFCCC website. August 2008. 

and uncertainty analysis and vulnerability 

and adaptation assessments at both the basic 

and advanced levels. 

Though the findings from the review of initial 

national communications were for all developing 

countries, they are also very specific to African 

countries. 

The other reason leading to low levels of activity in 

CDM as a strategy for reducing global emissions 

of GHGs in Africa has also been the chaotic 

nature of responses. Most African DNAs had 

imagined that “CDM world” would take form of a 

governmental process – very formal and easy to 

follow. 1 What actually emerged was a CDM that 

was very difficult to follow, with a lot of players all 

vying for the different products delivered by CDM 

– CERs, VERs (Voluntary Emission Reductions) 

and, to add to the pain, a number of funding 

windows. 

The different implementation strategies for CDM 

in the eyes of Africans has also led to the creation 

of several types of informal financial services – 

financiers, brokers and new financial packages 

1 Personal communication from the very small emitting countries, such 

as Lesotho, Namibia and others. 

– parallel to CDM, including, for example, ‘the 

Cool Earth Partnership’ and different standards 

being applied to CERs. 

African enterprises – particularly those that are 

taking part in the global market and exporting 

various commodities, ranging from agricultural 

derivatives via beef, fruit and sweet corn, to textiles 

to mining – have already undertaken emissionsreducing 

activities on their own initiative, mostly 

to ensure that they remained competitive and 

did not lose their markets. Unfortunately these 

projects were not registered with the DNAs, so, 

with no baseline developed, African countries 

kept losing out on the opportunities that CDM 

was to bring. In the meantime, Africa continues to 

see the development of various projects, ranging 

from energy crops to transport to afforestation 

and reforestation. 

Africa has a number of potential CDM projects, 

particularly in areas such as waste, energy 

efficiency and renewable energy options. The 

opportunities are attractive; methodologies are 

available, and there are also the experiences of 

other regions to learn from, especially South 

America, which African countries may draw on in 

developing CDM further to address their specific 

development needs. 

Improving Price Equity in CDM Projects: Strategies for Maximizing Carbon Value 

37 


CDM for Sustainable 

Development: reforms 

necessary for Africa 

A number of reforms are necessary for African 

countries to participate meaningfully in CDM and 

to ensure that CDM delivers what it was meant to. 

CDM and Sustainable 

Development: the vital link 

The UNFCCC objective (Article 2) broadly identifies 

two options for intervention: adaptation 

and mitigation. The focus in applying CDM has 

only been on mitigation. The only link between 

CDM and adaptation is the share of the proceeds 

of 2% of the sale of CERs as a contribution to the 

Adaptation Fund. 

Several African DNAs define sustainable development 

as essentially driven by socio-economic and 

environmental factors. The expectation is that 

adaptation and mitigation will be considered 

in tandem and that therefore any financial 

mechanism must be applied to both management 

options. 

Most governments still perceive issues of global 

warming and climate change as environmental 

concerns and therefore place greater emphasis 

on environmental response strategies. This means 

that a number of projects with the potential for 

benefitting from CDM do not do so. For example, 

waste – a potential sector for CDM – is not easily 

perceived as a potential energy resource. It will 

take a few examples to generate the catalytic effect 

to promote CDM as an associate measure and to 

use it to achieve sustainable development. 

What needs to happen to achieve 

sustainable development? 

Africa has no option but to elect sustainable 

development as the only vehicle of choice in 

meeting the challenges emanating from the 

vagaries caused by global warming and climate 

change. This choice is largely driven by the 

following key factors: 

Carbon emissions and Africa 

Africa contributes less than 4% 2 to global GHG 

emissions. Historically this figure has been even lower 

– Africa’s contribution to the GHG concentrations in 

the atmosphere is miniscule. This also presents itself 

as an opportunity for clean development, but only if 

sustainable development were to be emphasized in 

the CDM. Many people in African countries rely on 

wood for fuel, which is used for cooking, lighting and 

in colder winters also for heating. There are a number 

of projects aimed at reducing the amount of emissions 

that occur as a result. One aspect remains, however: 

the cultural attachment to cooking with firewood. 

Future reforms to CDM need to recognize these 

cultural aspects and to relate the GHG emissions to 

health and the other benefits that would result. 

Additionality and SD for Africa 

Low levels of development mean that Africa is 

bound to benefit from implementing CDM project 

activities. At the same time, a number of projects 

are still challenged by the application of the 

CDM eligibility criteria, such as the procedures 

required to demonstrate the eligibility of lands 

for afforestation and reforestation. Since most 

of the African population relies on subsistence 

agriculture, large amounts of land are cleared 

for this purpose. At the same time, firewood 

is as a primary energy source, which means 

2 World Bank Statistics, 1996. IPCC AR4. 

38 


that national baselines are low. How, then, will 

Africa achieve food security and implement 

CDM when GHG emissions from agricultural 

practices are significant? At the same time, Africa 

must develop to meet the demands of rising 

populations for better health, food security, 

improved infrastructure for roads, water and 

communications. 

CDM and Adaptation 

Global warming and climate change pose very 

serious challenges for Africa. Droughts, food 

security and extreme weather events related to 

climate change are already having a bearing on 

African economies. Climate change adaptation 

remains a viable option. CDM must in the 

future consider these realities. 

Necessary CDM structural and institutional 

reforms to stimulate Africa’s participation in 


There are a number of CDM reforms that need to 

take place to stimulate Africa’s participation in 

CDM. The CDM process itself needs review and 

simplification. Currently it involves a series of 

complicated steps. This in itself poses difficulties 

and hinders Africa’s participation in the CDM 

process. 

Sustainable development and CDM 

In a number of African countries, DNAs have 

developed or are in the process of refining their 

sustainable development criteria. The African 

sustainable development criterion typically has 

the following requirements: income-generation, 

environmental sustainability, employment-generation, 

capacity-building and technological develop 

ment. 

While it is important that sustainable development 

should be the goal, the output is already defined. 

Africa must at the same time reduce greenhouse 

gas emissions, otherwise the project activities will 

not qualify as CDM project activities. Sustainable 

development must therefore be a measure, not 

an objective, and the indicators are likely to show 

changes in employment levels, livelihoods and so 

on. 

Africa has a number of potential CDM 

projects, particularly in areas such as waste, 

energy efficiency and renewable energy options. 

By making sustainable development an indicator 

for CDM, one assumes that the components of 

the indicator will be measured. Who is going to 

do this? Should African DNAs now be verifying 

sustainable development for each project? And 

the question is, is this where we, Africa, should 

be devoting our energy? 

Communication strategy for CDM 

CDM needs to be communicated appropriately. 

Africa remains very vulnerable to misinformation 

by vendors and brokers until an appropriate 

communications plan has been put into effect 

for the continent. 

The communication strategy must be driven by a 

capacitated DNA and local committees in place 

in African countries. These may inter alia include 

the national committees for the development of 

national communications. 

The communication strategy must consider 

the void in environmental journalism. Most of 

the readership is still struggling with issues 

of governance, civil issues, food security and 


39 


development, to the extent that environment is 

relegated to almost the last priority level. The 

media must also be part of any communications 

strategy. 

Institutional framework and 

performance systems 

The current situation is therefore not the best 

suited for Africa. Most DNAs are therefore not 

active. There are a number of factors that demand 

institutional reform: 

• The difficulty is in understanding key 

issues such as validation: whether or not 

to allow cheap projects? This is especially 

the case, given that the private sector is 

generally starved of additional resources 

to invest in project development and 

validation. 

• The capacity of DNAs to participate 

effectively in the CDM and institutional 

appropriateness. Most DNAs are strongly 

associated with the foci of the UNFCCC, 

which itself happened to be anchored 

within the departments of meteorology, 

hydrology or the environment portfolio 

in general. The key questions are: Is 

this the most effective configuration? 

Does it matter where the anchor is? 

What additional capacity-building and 

institutional strengthening initiatives 

would be necessary? 

• The performance of the DNAs and CDM 

activity are not emphasized, and nor is 

geographical inequity in the distribution 

of CDM project activities. The CDM 

Executive Board may be requested 

by the Conference of the Parties to 

the UNFCCC to take this challenge 

as a measure of the performance and 

effectiveness of the CDM. 

The Nairobi Framework: 

placing a particular 

emphasis on Africa 

The Nairobi Framework, one of the significant 

outcomes of the Nairobi Climate Change Conference 

in 2006, is a plan to support developing 

countries and participate in the Clean Development 

Mechanism, especially in Africa. The Nairobi 

Framework has five objectives to move the CDM 

forward in the beneficiary countries: 

• Build and enhance the capacity of DNAs 

to become fully operational 

• Build capacity in developing CDM project 

activities 

• Promote investment opportunities for 

pro jects 

• Improve information sharing/ 

outreach/exchange of views on 

activities/education and training 

• Inter-agency coordination 

The Nairobi Framework recognized the lack of 

CDM activity in Africa. Out of the total of 47 

African Parties to the Kyoto Protocol, 37 have 

Designated National Authorities (DNAs), and of 

these only 16 have projects. On 14 April 2008, 

the global community celebrated the 1000 th 

CDM project. The African DNAs are sitting idle 

– probably not yet ready to go. 

Though CDM has been in place for some time, 

it is evident that there is still more work to be 

undertaken to implement the spirit of the Nairobi 

Framework. 

40 


Making the Nairobi Framework 

deliver: reforms necessary to enhance 

Africa’s participation in CDM 

Historically, CDM has placed the emphasis on 

carbon emissions reduction, energy efficiency 

and conservation, and less on sustainable 

development. To drive the SD agenda further 

forward, new methodologies must be developed, 

especially in those sectors where Africa has 

potential. This would minimize the cost 

associated with project development and also 

allow small-scale African projects to benefit 

from CDM. There are opportunities in transport, 

power transmission and distribution, and in 

sectors which use wood fuel. 

Build and enhance the capacity of 

DNAs to become fully operational; 

capacity and critical mass concept 

Currently very few people are active in 

discussions on climate change, CDM or carbon 

finance concepts. The few, usually counted in 

tens per country, are themselves not very well 

versed in these matters. The few would have 

benefitted from their participation as IPCC 

authors or participants in the UNFCCC process, 

and indeed may include individuals who may 

have also participated in the carbon forums and 

expositions. 

In developing reforms for CDM for Africa, one 

necessary condition is that a critical mass must 

prevail. To develop and maintain a critical mass, 

the future CDM and DNA capacity-building 

programme could follow a three-step approach: 

• Allow for the institutional strengthening 

and resourcing of DNA. This will enable 

DNAs to have specific and targeted 

resources for communication, project 

development, training of DNA personnel 

and funding the participation of additional 

personnel in DNA regional and 

international activities and programmes. 

• Develop and finance a scholarship programme 

in local universities for stu dents 

to undertake graduate climate-change 

studies across the main sectors. The 

sectors would be country-specific and 

should include finance and commerce, 

law, agriculture, water, social-sciences 

faculties, etc. The cost of training an African 

student in Africa would almost equal the 

cost of an airline ticket to Europe. The 

critical mass for this programme must be 

set at a minimum of twenty such graduate 

students. The net benefit and gain to the 

DNA and African countries is that the 

faculty is developed and the participation 

of Africans in the CDM process would be 

strengthened without necessarily being 

policy prescriptive. 

• Allow for and facilitate skills for developing 

CDM project proposals through south-south 

cooperation and north-south exchanges. 

This should not only aim at academia and 

the private sector but also the NGO and civil 

society. 

Promote investment opportunities for projects 

that enhance the role of the private sector 

The annual emissions reductions from the current 

projects being implemented across Africa show 

that most of them are of small and medium scale. 

This apparently is also the scale of private-sector 

activities in Africa, except for a few countries like 

South Africa, for example. 

In light of this reality, the role the private sector 

plays needs to be different and to take a different 


41 


approach. CDM is not well understood 3 by the 

private sector, e.g. how they may benefit not only 

from technology transfer, but also from carbon 

financing and emissions trading. In most cases, 

the immediate response of the private sector is 

to change to energy-efficient modes on their 

own initiative, without using the CDM window. 

In this way they strangle their limited financial 

resources and profits in fear of recriminations 

from government. There is also a need for 

Africa’s private sector to acquire an improved 

understanding of the legal aspects related to 

CDM project activities. In some cases, the private 

sector has signed off the CER opportunity without 

realizing the financial incentives, thus entering 

into emissions-reduction purchase agreements 

without full knowledge. 

Unlike the private sector in other regions of 

developing countries, in the African region the 

sector is limited to infrastructure and investment. 

In most African countries, save for a few including 

South Africa and some countries in North Africa, 

private-sector investment and project activities 

are short term, and the profits are minimal. Issues 

such as security, governance and corruption are 

usually singled out as reasons for this scenario. 

This therefore means that for African countries 

there are few opportunities to co-finance largescale 

CDM project activities. This in itself also 

contributes to low levels of CDM throughput. 

The challenges that face the private sector in 

Africa may also be viewed as opportunities for 

specific interventions. There is a need to enable 

the private sector so that it may link CDM to 

sustainable development and sustainable energy 

development objectives. 

3 UNEP Collaborating Centre for Energy and Environment (UCCEE), 

Accra, Ghana, 1998, in cooperation with Ghana EPA, IEA, UNDP and 

UNCTAD and sponsored by DANIDA and UNEP. 

The possible and immediate solution may be 

to ensure that specific funding is available to 

assist the private sector in African countries to 

recognize CDM as an incentive to achieve green 

development and remain globally competitive. 

Currently, even where the sectors are sizable, this 

is not the case. The private sector sees CDM as 

a complicated and lengthy process and also as 

expensive because of the validation process. 

The financial sector has not been very active 

except for South Africa, where the Southern 

African Development Bank is active in the 

CDM market. The financial sector needs to be 

stimulated to see carbon finance as another 

way of improving the bankability of projects 

they are already financing, thus minimizing 

risks or improving security. In South American 

countries, the financial sector is actively involved 

in developing CDM methodologies to promote 

CDM project activities or otherwise in the 

trading of carbon finance accruing from CDM 

project activities. New methodologies could 

be developed for Africa’s main sectors, such as 

public transport and firewood being replaced 

with solar energy, while also focusing on smallscale 

projects. 

In setting goals for African CDM initiatives, the 

following issues must be considered: 

• Opportunities for Sustainable Development 

need to drive CDM. 

• Removing the monkey load from CDM for SD: 

Africa must ensure that sustainable development 

does not become a load. Currently 

a number of countries are insisting 

on SD as if to mean that the sustainable 

development will be monitored. This is 

a very heavy load for DNAs, as it is timeconsuming 

to implement. Africa must 

ensure that future CDM will not commit 

and overstretch limited resources to evaluation. 

42 


• Guarantee clean development. Though the 

GHG emissions for development are small, 

there is a need to assure that Africa’s future 

GHG emissions scenarios result in 

and achieve minimum GHG emissions. 

• Implement CDM while also emphasizing 

methods to deliver environmental and 

socio-economic benefits, including improved 

health, increased employment 

opportunities, etc. However, further resources 

should not be spent on monitoring 

the benefits accruing from SD. 

The future of CDM for 

Africa, post-2012 

Given that extending the Marrakech Accords 

might not be a preferred option for a number 

of countries – especially given that this might 

lead to fresh negotiations – Africa may want to 

consider using the opportunity for the future 

review of the CDM. The Bali Action Plan was 

launched for this purpose in December 2007 

(decision1/CP.13) and is meant to enable full, 

effective and sustained implementation. The 

key elements of the Bali Action Plan include: 

(a) A shared vision for long-term cooperative 

action 

(b) Enhanced national/international action 

on mitigation of climate change 

(c) Enhanced action on adaptation 

(d) Enhanced action on technology development 

and transfer to support action on 

mitigation and adaptation 

(e) Enhanced action on the provision of financial 

resources and investment to support 

action on mitigation and adaptation 

and technology cooperation 

The Bali Action Plan is likely to have an impact 

on the future of CDM in Africa. A shared vision 

will provide positive opportunities if, and only 

if, it will also open up south-south cooperation 

potentials without compromising the value of 

the CERs. 

Technology transfers and CDM 

The shared vision must advance adaptation 

through finance and technology, including 

national adaptation programmes of action. 

The shared vision must emphasize sustainable 

development and promote access to affordable 

and environmentally sound technologies, as well 

as ways to accelerate the deployment, diffusion 

and transfer of affordable and environmentally 

sound technologies. 

Currently very few people are active in 

discussions on climate change, CDM or 

carbon finance concepts. The few, usually 

counted in tens per country, are themselves 

not very well versed in these matters. 

Africa may improve its adaptive capacity through 

the deployment of appropriate technologies. The 

fourth assessment report of the IPCC indicates 

that the water sector is one of the key sectors 

that will suffer the impacts of climate change. 

Water needs to be sparingly used. There are 

opportunities to apply technologies to improved 

water use efficiency. CDM has yet to make use 

of the technology opportunities under climate 

change adaptation. The project activities do not 

directly emit greenhouse gases, but if correctly 

applied, these technologies can lead to emissions 

reduction and improved energy efficiencies. A 

number of programmes could be put through 


43 


an experimental phase to demonstrate this 

opportunity, especially in the base sectors such 

as water and agriculture, as Africa is vulnerable 

to water shortages for human consumption and 

agricultural production. Adaptation technology 

applied to these sectors will also assist Africa in 

improving its water efficiency and food security. 

Making CDM work for Africa 

The CDM rules as they are today are complex 

and very cumbersome to apply and therefore 

open up different approaches to achieving the 

same outcomes. What is important is to ensure 

agreement on what will determine our measures 

for effective implementation and a shared 

vision. 

CDM needs to be extended to allow new areas, 

particularly where this would bring Africa 

on board. For example, under the CDM only 

afforestation and reforestation activities are 

eligible. For future commitment periods, CDM 

should be considered in connection with the 

The private sector sees CDM as a complicated 

and lengthy process and also as expensive 

because of the validation process. 

process established under the CP.13 decision 

on “Reducing emissions from deforestation in 

developing countries, later known as REDD”. 

African countries can play a significant role in 

reducing emissions globally if CDM is extended 

to recognize REDD as a CDM project activity. 

Deforestation is expensive to monitor, and 

CDM would provide the financial incentives for 

protection and monitoring to succeed. 

Another strategy for making CDM work for Africa 

could be to allocate a share of CDM projects to 

Africa, for example, by setting a specific target for 

Africa’s allocation of CDM projects. The UNFCCC 

Conference of the Parties may decide to set 10% or 

some other suitable allocation and to call for this 

allocation to be mainstreamed into the national 

programmes of Annex I parties and be reported 

under the national communications of Annex I 

parties. This would strengthen Africa’s ability to 

achieve sustainable development and at the same 

time make the continent more resilient to global 

warming and climate change. The allocation of 

a CDM share to Africa must also protect Africa 

from being bought cheaply. A minimum price of 

African CERs could be instituted with provision 

for revision in the future. 

CDM to benefit the most vulnerable 

CDM must therefore place an emphasis on the 

following key elements: how to improve CDM for 

the benefit of civil society, and how to bring on 

board the most vulnerable, who in most cases are 

also in countries with very little CDM potential. 

In the future, CDM should look beyond projectbased 

CDM and enhance the possibilities for 

programmatic approaches and project-bundling 

strategies. 

Currently the climate change project activities 

that would also generate CERs do not fall within 

the guidelines for CDM. There are a number 

of CDM-like funds. The level of activity and 

participation in other regions of the world 

– South America, for example – in voluntary 

standards and other such initiatives signal 

the opportunities involved and the quest by 

the most vulnerable in participating in CDMtype 

activities. Maybe, therefore, CDM should 

refine its guidelines to incorporate the new and 

innovative carbon finance activities. 

44 


The momentum and energy for such activities 

need to be harnessed, and CDM can play a role 

in this by: 

• Expanding the scope of activities allowed 

under the CDM. 

• Defining a new role for ensuring SD 

through CDM by bringing on board social 

aspects and benefits. 

• Engaging the rural development community 

when structuring internal trading 

schemes, and providing legal safeguards 

for communities and the environment. 

In the future, CDM must therefore establish a 

common approach for such CDM-type activities, 

and at the same develop capacities in countries 

for these activities to happen. 

David Lesolle has extensive experience working within 

Botswana Government, heading a number of units and 

divisions, including the Climate Applications Branch. 

He has recently developed a climate change policy for 

Botswana Government that emphasizes a mix of approaches. 

Contact: DLesolle@gov.bw 


45 


46 


Diana Liverman, 

Emily Boyd 

Oxford University 

The CDM, ethics and development 

Abstract 

In this paper, we address the social and ethical 

controversies of governing the CDM for the 

poor. In order to explain why the debates are 

deeply polarised, we examine the key social 

perspectives on the mechanism and place them 

within fundamental debates within the social, 

economic and environmental sciences. We 

then explore the way in which CDM critiques 

are closely aligned with existing development 

thinking, identifying core narratives relating to 

knowledge politics, stakeholder accountability 

and rights-based perspectives and associated 

archetypical stories. In the discussion, we examine 

ways in which the reform of the CDM may address 

some of the core barriers to its acceptance. 

In the run up to Copenhagen in 2009, the 

pressure is mounting for policy-makers to 

address key governance reform challenges posed 

by the Clean Development Mechanism. The CDM 

has come under criticism from many different 

sources – governments, local residents, and 

NGOs, as well as the research community. This 

paper focuses on perspectives from the research 

community, seeking to explain criticisms of the 

CDM in terms of longstanding and deeply rooted 

debates about environment and development, 

and examines potential reforms in terms of their 

ability to respond to some of these criticisms. 

We provide extensive references to the academic 

literature for those interested in understanding 

the origins of worldviews that are influencing the 

debate over the CDM. 

47 


To date, the CDM has spurred the development 

of more than 4000 projects in 70 developing 

countries. 1 These projects are expected to reduce 

global greenhouse gas emissions by up to 2.6 

Gt CO 2 

-equivalent by 2012. CDM projects are 

at various stages of registration, validation and 

review in the CDM ‘pipeline’. As of September 

2008, more than a thousand CDM projects 

were registered and more than 150 were in the 

registration process. The majority of projects to 

date are large-scale methane land-fill gas projects, 

N 2 

O and renewable energy projects. The CDM is 

expected to generate billions of US dollars and 

thus also contribute to various development 

funds, including the adaptation fund. 2 

Discussion of the CDM often focuses on 

three issues: (i) the need to demonstrate that 

projects are truly additional (that the benefits 

to the climate and carbon cycle are more than 

what would have been the case otherwise); (ii) 

the requirement that projects contribute to 

sustainable development; and (iii) the extent to 

which industrial countries should meet their 

emissions commitments through the CDM 

rather than through domestic actions. 3 Although 

additionality and sustainable development 

criteria are defined within the formal CDM 

procedures, there are considerable ambiguities, 

especially in the evaluation of sustainable 

development benefits. Sustainable development 

in the CDM relates to the measurement and 

monitoring of a project’s social, economic and 

ecological contributions and is currently assessed 

by the host country, but it is poorly defined. 

Additionality is also contested because of the 

need to establish a counterfactual story about 

what would have happened in the absence of the 

project and/or carbon finance. Debates about the 

role of the CDM in meeting emissions reduction 

targets resulted in the EU and several countries 

limiting the use of offsets because of concerns 

about ethics and technology innovation. 4 

Underlying discussions about the state and 

reform of the CDM are a set of more profound 

disagreements about the rationale and impacts of 

carbon trading that are linked to the theoretical, 

disciplinary and political perspectives of 

different groups of scholars and other critics. 

These include arguments from economics, earth 

science, ethics, political science and development, 

which often reflect very different world views. As 

we will show, addressing these multiple visions in 

the reform of the CDM is challenging, perhaps 

only being able to reflect those perspectives that 

are well grounded in previous experiences of 

development. 

Economic perspectives on the CDM 

The economic argument for offsets and the CDM 

is that greenhouse gases are externalities that 

can be addressed through regulation, taxation, 

and/or trading, and that emission reductions 

are cheaper and faster in the developing world. 5 

Thus, if scarce resources are to be devoted to 

emissions reductions, the rational choice is to 

allow countries, firms, and individuals to pay for 

them in the developing world, where the same 

amount of money can buy more reductions and 

allow for maximum benefit at minimum cost. 

So, for example, an industrial country where 

energy efficiency is already high (such as Japan) 

or a sector where emissions reductions are 

technically difficult (such as livestock) can use 

offsets as a cheaper or easier way to meet its 

1 UNEP (2008) 

2 Boyd et al. (2008) 

3 Boyd, Hultman, Roberts, et al. (2007); Wara (2006); Yamin (2005) 

4 Reece, Phylipsen, Rathmann, et al. (2006) 

5 Halsnæs (1996); Hepburn (2007);); Woerdman (2000) 

48 


obligations. The assumptions are those of trade 

in general – that trade allows for specialisation 

and comparative advantage – and that the CDM 

is therefore trade in a commodity that may be 

cheaper in the global south. From this economic 

perspective, any constraint on the use of the 

CDM would be a barrier to free trade and would 

prevent the rational use of resources. However, for 

those critical of trade – who see it as an unequal 

power game for example – this rational economic 

argument for the CDM is unacceptable. 6 

Another critique of rational choice economics 

is that choices are rarely rational because of 

incomplete information and political, economic, 

psychological and cultural constraints. 

A second economic issue relevant to the CDM 

is the controversy over the spread of market 

environmentalism – the concept that the best 

way to manage the environment is to allocate 

property rights to nature (including climate 

and carbon emissions) and to realise its value 

through the market and private ownership. 

According to this perspective, those who value 

environmental protection and the benefits of 

a stable climate or clean water will be willing 

to pay for these ‘environmental services’. A 

significant number of environmental scientists 

and conservation organisations have seen the 

market as the most viable way to obtain funds 

to protect ecosystems. 7 Thus carbon trading is 

seen as a market environmentalist response to 

the risks of climate change – rights or permits 

to pollute the atmosphere are assigned (or 

auctioned), a cap on emissions is established 

to drive demand, and the market is used to 

buy and sell excess or needed emission credits. 

Critics of market environmentalism have turned 

their attention to the carbon markets and the 

CDM, variously arguing that the atmosphere is 

a common property resource that should not 

be privatised (even if only as a pollutant dump); 

that emissions rights have been unequally 

distributed (on the basis of prior pollution 

rather than a more equitable basis); that the true 

values of nature, including climate damages, are 

unquantifiable and unpriceable; that profits in 

an unregulated market can flow to unscrupulous 

‘cowboy capitalists’; and that private ownership 

is an undemocratic way to manage nature. 8 

The CDM and the carbon cycle 

Earth system science would understand the CDM 

as part of the carbon and other global cycles, 

contributing to reductions in greenhouse gases 

within the uniformly mixed global atmosphere. 

For earth scientists, the primary metric of 

success for the CDM and other climate policies is 

the overall additional and measurable impact on 

greenhouse gas concentrations. 9 By seeing the 

CDM as part of the carbon cycle, earth science 

draws attention to the multiple opportunities to 

intervene in the system – by managing forests 

and soils, by capping fossil fuel and cement 

emissions, and by including the full range of 

greenhouse gases – but also to the tremendous 

uncertainties associated with measurement, 

interannual and spatial variability, permanence 

and leakage. In terms of reducing the risks of 

dangerous climate change, earth scientists 

such as James Hansen argue for much stronger 

regulation of fossil fuels (including a ban on coal 

in some cases) and might oppose carbon trading 

and the CDM on the grounds that, in contrast 

to strict caps on emissions from all countries, 

trading has delayed the necessary cuts and made 

only modest contributions to date. 

6 Emmanuel and Bettelheim (1972); 

7 Daily and Ellison (2002); 

8 Bachram (2004) 

9 Field and Raupach (2004); Steffen, Noble, Canadell, et al. (1998) 


49 


The CDM and theories of 

technology innovation 

The CDM is often promoted as a way of transferring 

low-carbon technologies to the developing 

world, and in the case of proposals for 

sectoral CDM, for diverting whole economic 

sectors into more efficient and less fossil fuelintensive 

development paths. Because a wide 

range of technologies are approved and proposed 

for the CDM, advocates and critics of its role in 

technology innovation argue from several different 

perspectives. 10 Advocates of the CDM draw on 

theories of innovation and energy transitions to 

argue that it can help to spark innovation in the 

developing world, but it is also possible that, by 

displacing carbon reductions to the developing 

world, the CDM reduces pressure for domestic 

low-carbon technologies in the north and lowers 

the price signal that drives innovation. Scholars 

who see technology choice as purely a matter of 

economics or technical effectiveness in reducing 

greenhouse gas emissions might argue that a 

broad range of lower carbon technologies should 

be included in the CDM, including nuclear and 

carbon sequestration and storage (CCS), whereas 

others concerned with risk, public perception 

or sustainable development issues would argue 

that not only nuclear should be excluded on the 

grounds of risk and perceptions, but also HFC 

capture because of questionable development 

and innovation value. Another perspective 

on technology and the CDM derives from the 

science and technology studies (STS) literature, 

which argues that technologies are not neutral 

but embody particular social and environmental 

relations, often promoted through specific 

discourses (e.g. narratives) and governmentalities 

(e.g. regulations, monitoring systems). 11 In this 

case, the proposals for CDM methodologies for 

woodstoves would come with a set of narratives 

about appropriate technology, poverty, gender 

and conservation, whereas those for large-scale 

wind or methane capture would carry messages 

about industrial development. 

The CDM and international relations 

From an international relations perspective, the 

CDM can be viewed as a north-south bargain 

that is critical to the success of the international 

climate regime because it has provided a way to 

reduce emissions in the south and to include the 

developing world in the carbon markets, while 

avoiding binding emissions reductions that were 

politically unacceptable to most developing 

countries. However, political theorists might 

differ substantially in their analysis of this 

bargain. Traditional state-centred approaches 

are uncomfortable with international agreements 

like the CDM, which has such heavy involvement 

of private, non-state actors. Political economists 

see the CDM through the lens of a world system 

in which powerful interests and countries control 

international relations to ensure the smooth 

functioning of their economies, and they would 

suggest that the CDM was designed to serve the 

needs of capital by providing cheap emission 

reductions, that it has a neo-colonial character or 

that it is biased to the interests of more powerful 

developed and developing countries such as 

China. Another perspective is that global regimes 

such as the CDM overlook particular national 

and cultural conditions, including human rights, 

property institutions, government systems, and 

views of nature. 12 

10 Grubb (2004); Dechezleprêtre, Glachant and Ménière (2008); 

Schneider, Holzer and Hoffmann (2008) 

11 Backstrand and Lovbrand (2006); Oels (2005) 

12 Weber (2001) 

50 


Ethics and the CDM 

Philosophical perspectives on climate policy 

have traditionally focused on issues of ethics and 

justice, but have not for the most part directly 

addressed the CDM. 13 In terms of ethics, the 

popular critique of offsets as indulgences has 

some roots in ethical discussions because the 

fundamental objection is that paying someone 

else to reduce emissions rather than reducing 

them yourself is unethical. 14 Such ethical 

criticisms are of concern to corporations who 

seek to purchase CDM credits but at the same 

time are worried about the views of consumers, 

shareholders and the media. They seek a strong 

ethical defence of offsets and the CDM for their 

corporate social responsibility reports. There are 

also human rights-based arguments that can be 

applied to the CDM, especially in cases where the 

privatisation of carbon is seen to encroach on the 

rights of local people to land or when people are 

not included in decision-making about projects. 15 

The latter is an example of theories of procedural 

justice – where the questions of who is involved in 

decisions are important – and can be contrasted 

with the numerous questions of distributive 

justice raised by the CDM. Distributive justice 

arguments emerge in the many commentaries 

on the unequal pattern of CDM projects – with 

a bias to larger developing countries such as 

India, China and Brazil and to certain gases and 

technologies – and in the distribution of local 

costs and benefits of projects. An alternative 

ethical position is that it is selfish to invest in 

expensive domestic emissions reductions when 

the CDM provides faster options for reducing 

climate risks, as well as side benefits to the poor 

in terms of cheaper energy, jobs, or health. 

The CDM and development 

Some of the most persistent criticisms of the CDM 

have focused on its failure to alleviate poverty 

and provide local sustainable development 

benefits. 16 Although CDM is technically not an 

external development intervention, nor are CDM 

projects structured like a typical aid project, 

development theorists are still likely to see the 

The economic argument for offsets and the CDM 

is that greenhouse gases are externalities that 

can be addressed through regulation, taxation, 

and/or trading, and that emission reductions 

are cheaper and faster in the developing world 

CDM and other emissions reductions projects as 

a standard development project with financing 

from the north for technology in the south. One 

need only look at the 544 small-scale registered 

CDM projects to see how they might be linked to 

pressing local development priorities in the Global 

South. 17 International development agencies and 

banks have purposefully driven a campaign for 

‘carbon with a human face’ in efforts to address 

poverty alleviation and technology transfer by 

the CDM. The World Bank, for example, was 

one of the first players to actively create several 

carbon finance funds for development in the 

early days of CDM development (over the longterm, 

financial flows from the CDM could reach 

up to US$50 million compared to current ODA 

flows, which are around US$100 million 18 ). These 

estimated financial flows to the Global South 

raise new questions about how CDM finance 

13 Adger, Huq, Mace, Paavola (2005); 

14 Smith (2007) 

15 Bond and Dada (2004) 

16 Olsen (2007) 

17 Michaelowa and Michaelowa (2007) 

18 World Bank (2006) 


51 


complements or compromises existing aid flows 

in unanticipated ways. Some onlookers are 

concerned that in the early CDM gold rush the 

social development dimensions of this ‘complex’ 

development mechanism gained limited attention. 

The heady days when buyers and investors 

From an international relations perspective, 

the CDM can be viewed as a north-south 

bargain that is critical to the success of the 

international climate regime because it has 

provided a way to reduce emissions in the 

south and to include the developing world in 

the carbon markets, while avoiding binding 

emissions reductions that were politically 

unacceptable to most developing countries. 

bought anything they could get their hands on 

are over, and investors are looking for a reformed 

CDM that includes quality projects that provide 

social development. The extensive knowledge 

requirements and transactions costs across layers 

of administrative scales have unavoidably led to 

accountability and transparency challenges that 

require reform to ensure the effective delivery of 

benefits to local stakeholders. 19 

The jury is still out on whether the CDM can 

deliver to the poor. What is known to date is 

that the CDM has primarily delivered large-scale 

industrial projects in two regions of the world, 

at times implemented without local consent 

or without factoring in stronger participatory 

mechanisms. CDM has been weak on addressing 

resource access or multiple objectives in forest- 

based pilot carbon offsets, and financially it has 

benefited the developers and designers of CDM 

projects. 20 

These early findings of CDM social impacts 

perhaps also fit in with various expectations 

that people have of failed environmentdevelopment-related 

initiatives and schemes. 

Many of the critical development perspectives 

on the CDM are influenced by major debates 

over previous development interventions. 

The three archetypical stories that are widely 

discussed in the literature are the Green 

Revolution in agriculture, the building of largescale 

dam infrastructure, and the promotion of 

conservation and protected areas. These stories 

relate insights for a more nuanced understanding 

of the governance and consequences of CDM for 

development. We devote the rest of this paper to 

discussing these stories and showing how they 

cast light on current challenges encountered in 

delivering pro-poor CDM. 

Development perspectives and the CDM 

There are widely different perspectives on 

development, including modernisation theory 

(an evolutionary approach that saw traditional 

societies progress through stages of development 

towards a modern economy) and flows of finance 

and technology from north to south accelerating 

this process and dependency theory (where 

wealthy nations make poorer nations dependent 

on them through colonialism, unequal terms 

of trade, debt, and control of international 

relations). Other development theorists see many 

development projects as misguided interventions 

that take little account of local conditions and 

wishes, use inappropriate technologies, and often 

19 Muller (2007) 

20 Boyd, Gutierrez and Chang (2007); Wara (2007) Lohmann (2006) 

52 


provide unequal benefits within communities. 21 

A positive modernising development perspective 

on the CDM sees offset projects as providing 

multiple benefits to local communities, including 

direct revenue, jobs, cheaper and healthier 

energy, and biodiversity protection. CDM 

projects might contribute to the alleviation of 

poverty and the general improvement in rural 

livelihoods. Dependency and other critical 

theorists would highlight the ways in which the 

CDM benefits the north more than the south, 

is controlled by northern interests and finance, 

introduces inappropriate technologies, and 

fosters inequality within communities. 

(i) Knowledge politics and the CDM 

Technology transfer is central to the future of 

CDM and will depend on the type of technology 

transfer, technology choices and investment 

decisions of governments and corporations. A 

knowledge politics lens explains how misguided 

development results from poor understanding of 

context and place. 22 The underpinning argument 

is that unequal power relations exist between 

those who possess technical knowledge and those 

who do not, and that this difference disadvantages 

local stakeholders in important decision-making 

processes that affect their livelihoods. This lens 

has been used to explain the negative social 

consequences of CDM projects in India. 23 

The development community has many examples 

of knowledge and technology transfer to the Global 

South. One such example is the Green Revolution 

– a response to famine in India and other regions 

of the developing world. With assistance from US 

aid organizations and international scientists, 

a program began of plant-breeding, irrigation 

development and agrochemical financing – a 

package of technologies designed to increase 

crop yields. This revolution has contributed 

to raising Asian per capita food production by 

27% and making India food self-sufficient to 

the extent that ‘no one sleeps with an empty 

belly’, but it has also come under a great deal 

of scrutiny. In particular, failures to prioritize 

agrarian reform over technological solutions 

have lead to poor people being locked into rural 

debt by having to purchase inputs. Success has 

largely been dependent on access to credit and 

land. On the environmental impacts, there has 

been a reduction in agricultural diversity and 

biodiversity due to a reliance on a few highyield 

crops and the expansion of agricultural 

monocrops. Subsidy programs have contributed 

to the inappropriate use of inputs and the 

resource degradation that could be contributing 

to the declining rates of growth in crop yields. 24 

The Green Revolution was seen to increase 

inequality in communities as the better off gained 

access to the new projects and the poorest were 

excluded and as women were excluded from 

training and other benefits and struggled with 

the ecological impacts of inputs, fertilizers and 

loss of biodiversity. 25 The Green Revolution 

has polarized the western environmental lobby, 

scientists and policy-makers in the Global South. 

Western NGOs have been accused of taking 

a ‘elitist’ view of poverty in the Global South, 

yet more recently, scientists acknowledge that 

some billion people are still undernourished 

and lack food security and are calling for a 

second revolution as a response. 26 The CDM 

has some parallels to the Green Revolution in 

the transfer of technologies to poor households, 

21 Willis (2005) 

22 Fairhead and Leach (1995) 

23 Lohmann (2008) 

24 Wichelns (2004) 

25 Sobha (2007) 

26 Lynch (2007) 


53 


the need for technical knowledge and assistance 

to implement successful emissions reductions, 

and the potential to create social and gender 

inequalities. 

(ii) Stakeholder accountability and the CDM 

Although not an intervention per se, as a project 

vehicle the CDM struggles with inconsistencies 

between the idea connected with pro-poor CDM 

that it is supposed to include consultation with 

local people and the actual practices of delivery. 

Accountability perspectives in development 

highlight the need for transparent and 

legitimate standards, procedures and stakeholder 

engagement in development planning and the 

execution of development projects. One of the 

most controversial experiences of the development 

community concerning accountability has been 

the experience with the construction of large 

dams and water management projects. Between 

1950 and 1990, the World Bank and other 

development agencies focused finance on the 

construction of large infrastructural projects 

in the Global South, including numerous large 

dams such as the Volta, Aswan and Three Gorges. 

Among the many criticisms of these large projects 

was the lack of consultation of local people, who 

were often relocated and whose livelihoods were 

affected by the dams and reservoirs. 27 In response, 

in 2000 the World Commission on Dams 

delivered a report that called for the screening of 

large projects and transparency in dam-related 

decision-making processes. 28 Scholars have noted 

the importance of consensus-building among 

those impacted by the construction of big dams 

and are urging that greater emphasis be placed 

on the way that peoples’ values, expectations and 

political allegiances change over the lifetime of a 

dam project in order to identify which important 

assumptions are built into the stakeholder 

structures, and the types of knowledge that exist 

between experts and lay persons. 29 While the CDM 

community turns to consider broad governance 

reforms to the operational procedures for 

CDM validation and verification, the issue of 

accountability regarding social sustainability 

remains a challenging one, and there may be 

lessons to learn from the experience of large 

dams. This is particularly the case in contexts 

where there are discrepancies between national 

sustainable development criteria, validation and 

project implementation. 

(iii) Rights-based forest 

perspectives and the CDM 

The final example of the legacies of previous 

development experiences is that of prior attempts 

at forest conservation and its implications for any 

consideration of forestry within the CDM. Any 

CDM project in the land use and forest sector 

is likely to encounter methodological challenges 

in establishing baselines proving additionality 

and leakage, as well as in how to ensure a 

functioning long-term institutional governance 

framework. A long tradition of research in forest 

governance has revealed numerous problems 

with forest projects being driven by northern 

interests or implemented with insufficient 

attention to local ecology, culture and land 

rights. 30 Rights-based perspectives draw insights 

from other forest initiatives, in particular 

Integrated Conservation and Development 

Projects (ICDP). ICDPs emerged in the 1980s 

and were specifically aimed at tackling nonparticipatory 

approaches to conserving national 

parks. The number of ICDPs rose from 20 in the 

27 Goldsmith and Hildyard (1985) 

28 World Commission on Dams (2000) 

29 Lockie (2007) 

30 Gibson, McKean and Ostrom (2000); 

54 


1980s to 300 in the early 2000s. They are also 

known as community-based natural resource 

management (CBNRM) and are often concerned 

with providing employment by ecotourism and 

sustainable livelihood alternatives. Above all, 

these schemes aim to avoid the threat of local 

development on biodiversity conservation. 

However, ICDPs have struggled to gain credibility 

due to predefined (mostly scientific) external 

priorities set by conservation organisations and 

national governments, alongside the exclusion of 

minorities such as women and landless. It is often 

the case that unpopular agricultural options are 

provided where local people want cattle and 

credit to build up capital. The costs and risks 

of engaging in local development, such as land 

tenure planning, can be time consuming and 

off-putting for some conservation organisations. 

A recent evaluation of community-based 

forest management in Nepal shows that poor 

communities still gained little from a long-term 

programme funded by Australian aid finance. 31 

Similarly, some show that, without gaining a clear 

understanding of intra-community dynamics and 

of community members’ perceptions of external 

groups, the design of appropriate strategies for 

collaboration in forest management is likely to 

fail. 32 Recently findings suggest that conservation 

and development programs can positively affect 

people if they mainstream outreach efforts that 

address the particular localized manifestations of 

health problems such as HIV/AIDS in the context 

of natural resource management. 33 In revisiting 

forests and land-use change under a post-2012 

agreement, the rights-based perspective is 

certain to be present. Already discussions on 

Reduced Emissions from Avoided Deforestation 

31 Thoms (2008) 

32 Horowitz (2008) 

have sparked a response from civil society 

regarding the negative impacts of REDD projects 

on local peoples. 

Can the CDM respond? 

How may an improved CDM satisfy the critics as 

outlined in the six perspectives? While important 

lessons can be drawn from previous experiences 

in development, the range of perspectives 

discussed in the first part of the paper means 

that it is well nigh impossible for a reformed CDM 

to satisfy some of its critics, especially where 

scholars have very different and deeply rooted 

views of economics, ethics or the structure of 

In terms of ethics, the popular critique of 

offsets as indulgences has some roots in ethical 

discussions because the fundamental objection 

is that paying someone else to reduce emissions 

rather than reducing them yourself is unethical 

international relations. For earth scientists, a 

reformed CDM would need to ensure additional 

and significant interventions in the carbon cycle 

so as to reduce the risks of climate change more 

rapidly, perhaps including a broader range of 

greenhouse gases. Economists focused on the 

most efficient CDM might propose dropping 

the sustainable development criteria in favour 

of a focus on carbon alone. Some theorists of 

technology innovation might prefer sectoral 

and policy CDM that would promote largescale 

sociotechnical transitions. Ethical debates 

might clarify decisions about the proportion of 

emissions reduction obligations that should be 

made through offsets. 

33 Demotts (2008) 


55 


Development theorists might propose a CDM 

which gives greater weighting to poorer countries 

and ensures a more equitable participation and 

distribution of benefits within communities. 

As CDM moves from the frontiers of the ‘wild 

west’ to a mature market, the focus of market 

players is shifting increasingly towards highquality 

CERS with sustainability co-benefits as 

criteria. CDM reform includes the new kid on 

the block – Programmes of Activities (PoAs). 

These integrated and scaled-up projects open 

up hope for new opportunities for small-scale 

projects and should in theory act as an incentive 

for the delivery of sustainable development to 

low-income communities. Examples include 

rural lighting in India, energy retrofitting and 

small community waste treatments. Although 

Programmes of Activities are creative, they 

are presently confronted with a multitude of 

challenges, such as unclear methodologies and 

sampling norms, EB discrepancies and reluctant 

validators. The development perspectives in this 

essay illustrate that the CDM community faces 

the dual challenges of accommodating plural 

perspectives and practical operational issues. One 

of the most important tests for the community 

will be to avoid polarisations around CDM reform 

and keep the process moving forward. 

As yet we do not have this accumulated body 

of work on the CDM, and careful comparative 

and data rich studies are needed to understand 

under what conditions the CDM contributes to 

sustainable development and rapid emissions 

reductions. 

Diana Liverman is the Director of Oxford University’s 

Environmental Change Institute, coordinating work in climate, 

energy and ecosystems with a strong applied and policy focus 

that includes the UK Climate Impacts Programme, the Tyndall 

Centre and UK Energy Research Centre. 

Contact: diana.liverman@eci.ox.ac.uk 

Emily Boyd is a post-doctoral fellow at the Environmental 

Change Institute and senior researcher at the Stockholm 

Resilience Centre, Stockholm University. She specializes in 

climate change and international development with current 

research focused on carbon markets and development in India. 

Contact: emily.boyd@ouce.ox.ac.uk 

In this paper, we have discussed some of the 

underlying theoretical and political perspectives 

that may underpin debates about the CDM and 

have shown how past experiences of environment 

and development may foster scepticism about 

the sustainable development benefits. It is, 

however, important to note that the theoretical 

critique and evaluation of large dams, the 

Green Revolution and conservation projects 

are supported by several decades of careful 

empirical studies that have included fieldwork 

by independent researchers to understand under 

what conditions these projects succeed and fail. 

56 


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57 


58 


Hans Jürgen Stehr 

Danish Commission on Climate Change Policy 

Does the CDM need an 

institutional reform? 

Abstract: 

This article deals with the present projectbased 

CDM from a governance perspective. 

In terms of volume and numbers, the CDM 

seems to have met the expectations of the 

political system. The question is whether it is 

sufficiently adapted to this success and potential 

expansion. A number of private stakeholder 

suggestions and options presently discussed 

by government representatives preparing for 

COP 15 are analysed. The article identifies as 

an important issue that powers, which in other 

regulatory systems would typically be divided, 

are concentrated at the Executive Board level in 

the CDM system. In conclusion, it is suggested - 

as a package - to move towards more top-down 

standardization of methodologies, to strengthen 

standard setting and supervision of DOEs and, as 

an institutional change, to introduce an appeals 

system for cases of registration and issuance while 

at the same time abolishing the review procedures. 

This article looks at the Clean Development 

Mechanism from a governance perspective. It 

will refer to some governance theory but it is not 

meant to be scientific, since I am no governance 

expert, nor is it meant to solve everything. It attempts 

to give some answers to the question how 

governance of the CDM might be improved and 

whether any such improvements might imply institutional 

changes. 

In creating the CDM, the UN system has actually 

succeeded in building up the framework for 

a market mechanism that works in spite of its 

imperfections and fosters significant financial 

flows to environmentally sensitive projects in developing 

countries. That in itself comes close to a 

miracle. But even miracles can be improved on. 

A lot of effort is continually being made, not least 

* the essay represents the authors’ personal views and not necessarily the 

position of the Government of China or the National Climate Change 

Coordination Committee Secretariat, 

59 


y the Board, in order to transform the lessons 

learned and experience gained into improved 

manageability and transparency of the present 

system, aiming to ease the ability of the stakeholders 

involved to manoeuvre and at the same 

time ensure the required environmental integrity. 

It has to be born in mind that the CDM has 

only been fully operational for a relatively short 

period since the Kyoto Protocol came into force 

in early 2005. 

The private sector and other stakeholders have 

been very active in providing contributions on 

how to improve the system. Some of them are 

reflected in this article, as are a number of suggestions 

and options presently being discussed 

within the framework of the Ad Hoc Working 

Group for Further Commitments for Annex I Parties 

under the Kyoto Protocol (AWG KP). 1 

The article is based on my personal experience 

from having served for six years on the CDM Executive 

Board, on countless formal and informal 

discussions with stakeholders, and, hopefully, on 

some common sense. The focus will be on the existing 

project based CDM governance system as 

this has developed so far 2 and within that context 

on the basic functions of the Executive Board, 

this being the core body of the system. 

First, the article will define governance and assess 

the achievements of the CDM in terms of the 

number and volume of projects that have been 

generated or are under preparation. The powers 

granted to the Executive Board and the style 

of regulation are then analysed. Based on this 

1 

1 See the compilation in doc. FCCC/TP/2008/2 sect. III.A (http:// 

maindb.unfccc.int/library/view_pdf.pl?url=http://unfccc.int/resource/ 

docs/2008/tp/02.pdf) 

2 The article does not deal with suggestions to extend the scope and 

scale of the CDM into e.g. sectoral concepts, nor does it deal with market 

implications as such or suggestions to directly or indirectly influence 

market penetration of CERs. 

analysis, improvements to the existing governance 

system of the CDM are discussed. Finally, 

the article concludes by suggesting – as a package 

– more top-down standardization of methodologies, 

strengthened supervision of DOEs and 

introduction of an appeal system for registration 

and issuance cases with, as an institutional 

change, an independent appeal body. 

2. Governance and the CDM 

The World Bank broadly defines governance as 

‘the exercise of political authority and the use of 

institutional resources to manage society’s problems 

and affairs’. 3 More specifically, governance 

relates to decisions that define expectations, 

grant power or verify performance. 

The expectations of the political system is that 

the CDM as it is designed will deliver the public 

goods expressed in its objectives in the shape of 

real, measurable and additional reductions and 

the promotion of sustainable development, i.e. 

output legitimacy. 

Power is granted to institutions by the Kyoto 

Conference of Parties (COP/MOP or CMP), 

with the Executive Board in a core role and with 

Board-accredited validators and verifiers (Designated 

Operational Entities, DOEs) and nationally 

appointed Designated National Authorities 

(DNAs). 

The institutions exercise their powers as basically 

regulated in the Modalities and Procedures 

of Marrakech (who does what) in a certain style 

of regulation (how is it done). Taken together, 

the institutional framework, the regulatory system 

and the style of regulation determine the ef- 

3 World Bank 1991, ‘Managing Development: The Governance Dimension’, 

Washington D.C. 

60 


ficiency of the system, not least in terms of the 

transaction costs involved. 

The incentive for the private sector to participate 

voluntarily is a positive sanction by the system in 

the form of the issuance of tradable credits corresponding 

to verified reductions (CERs). The 

way in which the regulatory system and the style 

of regulation represents the roles, interests and 

rights of participating stakeholders determines 

the input legitimacy. 

There is no systematic verification on a qualitative 

basis of the performance of the CDM system. 

There is, however, broad statistical coverage of 

the development of the CDM, provided in particular 

by UNEP Risø. 4 

3. Achievement of expectations so far 

The number of projects and the volume of 

investments are important although not exclusive 

indicators of output legitimacy. 

As of 1 September 2008, more than 3800 pro jects 

are in the pipeline, 5 including 1152 registered 

projects. In total up to 2012 they are expected 

to yield 1.5 billion CERs. 6 With a price of, for 

example, USD 20 per CER, USD 1.5 billion will 

become available for adaptation through the 

CDM (2% share of proceeds). 

The steady flow of projects entering the pipeline, 

in the order of 120 per month, might be seen as 

an indicator of continuous private-sector interest 

and possibly of confidence in the system as it 

has actually been designed and is developing. 

The CDM, being a bottom-up mechanism, very 

much represents a carrot style of regulation. 

Another way to assess the success of the CDM is 

to look at the significant investment flows into 

CDM projects. According to a 2007 UNFCCC 

report on investment and financial flows, the 

capital that will be invested in CDM projects 

registered during 2006 is estimated at about 

USD 7 billion. The estimated investment in 

renewable energy and energy-efficiency projects 

of USD 5.7 billion is roughly triple the official 

development assistance support for energy 

policy and renewable energy projects in the 

same countries. The capital that will be invested 

in projects that entered the CDM pipeline 

during 2006 is estimated at over USD 25 billion. 

In comparison, the total investment leveraged 

through the Global Environment Facility (GEF) 

in the area of climate change since it started is 

USD 14 billion. 7 

The present and expected volume of the CDM 

does not reflect a corresponding north–south 

4 See statistics provided by UNEP Risø http://cdmpipeline.org/ 

5 This figure should be reduced by approximately 20% to take into account 

projects that are expected not to pass validation or to be rejected. 

6 The total expected number of CERs accumulated up to 2012 according 

to project information will be approximately 2.75 billion. The figure 

quoted of 1.5 billion takes into account an estimated 40% reduction 

due to the reduced number of projects actually registered (cf. previous 

footnote) and a some postponing of issuance relative to performance. 

7 For details, see Dialogue working paper 8, paragraph 41. See http:// 

unfccc.int/files/cooperation_and_support/financial_mechanism/financial_mechanism_gef/application/pdf/dialogue_working_paper_8.pdf 

and 

the Carbon Markets chapter of the background paper. http://unfccc.int/ 

files/cooperation_and_support/financial_mechanism/application/pdf/ 

potential_of_carbon_matkets.pdf 

Does the CDM need an institutional reform? 

61 


transfer of new technology, since many projects 

so far have been registered without the involvement 

of foreign investment other than the purchase 

of CERs. The expectations of the political 

system – that sustainable development be promoted 

– are accommodated merely by definition, 

since confirmation thereof is the prerogative of 

parties to that same political system (the DNAs). 

In summary, it seems that expectations are being 

met and that the CDM can be considered a success 

in terms of numbers and volume and hence in assisting 

Annex I to achieve compliance. The question is 

whether the governance of the CDM and its institutional 

set up has been sufficiently adapted to this 

success and to a situation where there is a potential 

for even more projects to pass through its system in 

the future. 

4. Powers granted to the Executive Board 

The Board is super-ordinate within the mandate 

given by the CMP in the Modalities & Procedures 

(M&Ps) and in subsequent CMP decisions and 

guidance. Together with its support structure, 

the Board constitutes the centralised level of 

the governance system of the CDM. The DOEs 

act on a decentralised level, but as part of the 

centralised decision-making process. The DNAs 

exercise their specific national functions on the 

decentralised level. 

According to the M&Ps, the Executive Board 

takes the basic decisions necessary for the further 

implementation of the system. Hence, it has 

regulatory as well as executive functions. 

As a regulatory body, the Board adopts material 

rules as well as procedural rules. 

Material rules are the baseline and monitoring 

methodologies that constitute the basic eligibility 

requirements, including guidance and 

clarifications on how methodologies are to be 

understood. Methodological tools, such as the 

additionality tool, are not binding as such unless 

they have been incorporated into an approved 

methodology. However, they represent standards 

which are accepted by the Board. Thus the Board 

provides the conditions to be met in order for the 

project participans ultimately to achieve CERs. 

The procedural rules comprise, e.g., procedures 

for the approval and revision of methodologies, 

the accreditation, supervision etc. of DOEs, the 

submission of requests for registration and issuance, 

the review of such cases and the administration 

of the CER registry. In general, the Board 

provides procedural rules that govern participation 

in the administrative process, communication 

top-down and bottom-up, the decision-making 

process itself and any administrative review 

of decisions. 

In its executive function, the Board accredits 

DOEs, registers projects on the basis of DOE 

validations, issues CERs, governs the CER registry 

and decides its own budget and support 

structure through the Management Plan (MAP). 

Registration and issuance take place automatically 

upon submission or request by the DOEs, 

unless the Board itself decides to exercise its 

right to undertake a review, which will conclude 

in final registration or issuance (with or without 

corrections) or in final rejection. By deciding to 

undertake a review, the Board exercises a quasijudicial 

function in the sense that it contests the 

assessment of the conformity of the specifics of a 

case with the material rules that has been undertaken 

by another official body of the decisionmaking 

process accredited for that function, i.e. 

the DOE. 

The Board is composed of ten members and ten 

alternates, in practical terms working as a team of 

twenty, elected in their personal capacity by the 

62 


CMP for two-year terms with the possibility of reelection. 

They are expected to possess appropriate 

technical and/or political expertise. Candidates 

are nominated by the regional groups of 

the UN system plus by Annex I and non-Annex I 

respectively. Thus, of the twenty, twelve are from 

developing countries and eight from developed 

countries. The chair and vice-chair are, according 

to the M&Ps, elected by the Board itself for 

one-year terms alternating between Annex I and 

Non-Annex I representatives. 

At present, the meeting time alone amounts to 

approximately eight weeks per year. In addition, 

considerable time is spent preparing for meetings, 

exercising special functions on the Board 

itself or in panels and working groups etc. In its 

report to CMP-3, the Board has noted that presently 

there is no remuneration or compensation 

for this dedication of time. 8 The nomination 

process and the working conditions favour, in 

general terms, the election of government employees, 

most of whom belong to their national 

negotiation teams. 

Since early 2007, the CDM has been self-financing 

in practice, mainly through shares of the proceeds 

of issued CERs (initially paid as registration 

fees). This has given the Board control over 

resource allocations to the secretariat and over 

the development and implementation of an appropriate 

support structure. To assist the Board 

in accomplishing its tasks, it has set up several 

subcommittees or panels (presently the Accreditation 

Panel, Methodologies Panel, Deforestation 

& Reforestation Working Group and Small-Scale 

Working Group) as well as a Registration and Issuance 

Team (short RIT). Through the Secretari- 

8 Members and alternates are granted a daily subsistence allowance 

that is 40% more than the standard UN rate. Cf. decision 7/CMP 1 

paragraph 17. 

Table 1 

Stick, carrot, and sermon styles of regulation. 

The stick style of regulation The carrot style of regulation The sermon style of regulation 

Regulatory logic Command and control Incentives (mostly economic) Information and inducement 

Role of regulator 

Decides and enacts binding 

standards and rules 

Set out structures of incentives 

Provide information and encourage 

certain actions 

Role of regulated 

Freedom of choice is delimited 

by regulatory acts 

Voluntary, calculated choices 

based on incentive structures 

Voluntary choices subsequent 

to the information and sermons 

available 

Strengths 

High certainty of compliance 

and standardised effects on 

regulated actors 

Use of regulated actors’ 

personal utility functions and 

knowledge 

Use of regulated actors’ 

personal utility functions and 

knowledge 

Weaknesses 

Potentially rigid, inflexible and 

expensive 

Uncertainty about effect 

caused by reliance on individual 

calculus 

Source: Ole Helby Petersen 2008: ‘Theorizing on Public-Private Partnerships: Regulatory Regimes, Credible 

Commitments and Social Trust’, International Center for Business and Politics (working paper). 

Uncertainty about effect 

caused by reliance on individual 

calculus 


63 


at, these assist EB members to address validation 

and verification issues. The chairs and vice-chairs 

of expert panels and working groups are selected 

from among Board members and alternates in order 

to ensure appropriate interaction. 

5. The CDM and different 

styles of regulation 

Regulation is part of any system of governance. 

As shown in the following table, generically different 

types of regulation have different implications 

for the roles of the regulator and the regulated 

and different strengths and weaknesses. 

The CDM, being a bottom-up mechanism, very 

much represents a carrot style of regulation. 

From a broader governance perspective, the stick 

style of regulation can be the most efficient and 

provide the most output legitimacy. The carrot 

style might be less efficient, but on the other 

hand it ensures more input legitimacy. The sermon 

style might be least efficient but ensures input 

legitimacy. Hence, legitimacy and efficiency 

concerns are interdependent and at the same 

time often in conflict with each other. 

6. Improving governance 

of the existing CDM 

In this section, some key elements will be 

discussed regarding further improvements 

to the CDM governance system, with a particular 

emphasis on the core elements of 

the existing CDM, i.e. methodologies, accreditation, 

and registration and issuance. 

The focus will be on the balance between 

legitimacy and efficiency. 

6.1. Standardizing of methodologies 

From the point of view of project developers, it 

has been claimed that clarity over rules is an 

overarching prerequisite in order to attract investment. 

Clarity prevents the risk that projects 

will be deemed ineligible or that eligible projects 

will receive fewer credits than estimated. Risks 

tend to make investment unattractive, especially 

since capital needs to be deployed before actual 

approval of registration and issuance. 9 

In response, the Board has continually simplified 

and clarified various procedures by adapting 

them to lessons learned, experience gained 

and development of the mechanism in general. 

Examples are the extension of the grace period 

for use of an older version of a revised methodology 

to eight months, and the streamlining and 

encouragement of interactions between project 

developers and the secretariat on methodology 

issues. The Board also follows up with frequent 

guidance and clarifications. 10 

At the same time, the Board has consolidated 

a number of methodologies. The consolidated 

methodology for grid-connected electricity generation 

from renewable sources, for example, covers 

technologies or measures such as solar, hydro, 

tidal, wave, wind and geothermal, 11 which makes 

it the most widely applied methodology, used in 

more than 40% of all projects registered. 

Also, standardizing methodologies adds to clarity, 

and the Board has developed seven generic 

tools so far, 12 including the additionality tool and 

9 Presentation by Forrister at IETA side event on CDM at SBs, 11 June 

2008. 

10 See for examples the 2007 EB-report, paragraphs 37, 74 and 83, on 

guidance to project developers. 

11 ACM0002. 

12 The “technical” tools cover calculation of the emissions factor for 

electrical systems, calculation of project- or leakage-related CO2 emissions 

from fossil fuel combustion, calculation of project emissions from 

electricity consumption, determination of methane emissions avoided 

from dumping waste at a solid-waste disposal site, and determination of 

project emissions from flaring gases containing methane. 

64 


the combined baseline and additionality tool, 

referenced to in more than fifty methodologies. 

It is claimed that there is a lingering uncertainty 

about additionality, since it leaves it to the project 

participant to prove that the project in question 

is not a business-as-usual project. The additionality 

tool was first issued in October 2004. Since 

then it has been developed further by the Board, 

as practical experience was gained until the last 

update in August 2008. It is generally considered 

valid and helpful as top-down guidance. 

costs of the validation and verification of such 

projects could be exempt from paying a share of 

proceeds for administration. 

In the AWG KP the concern is raised about the 

DOEs assessing projects on behalf of the 

regulatory system while at the same being 

commercially connected to the project developers. 

Among the options suggested in the AWG KP, 

one is to allow the Board to pre-approve parameters 

or procedures to define a (conservative) 

standardized baseline for certain types of project 

activities, e.g. a benchmark or deemed value for a 

specific energy-consuming appliance or activity. 

A list could be established of project activity types 

that need or need not demonstrate additionality 

individually. A remaining task would be to ensure 

that the CDM is not applied in the implementation 

of policies etc. which would be implemented 

anyway. Ways of ensuring this could be to determine 

default subtractions of CERs to be issued 

or developing dynamic baselines to take into account 

the performance of CDM projects already 

implemented within that policy framework. 13 

In order to promote a more equal geographical 

distribution of projects, another option suggested 

in the AWG KP is to remove the requirement 

to demonstrate additionality for small-scale 

projects in specific host countries such as Least 

Developed Countries (LDCs) and Small Island 

Development States (SIDSs). Alternatively the 

13 See as an example ACM0013, “Consolidated methodology for new 

grid connected fossil fuel fired power plants using a less GHG intensive 

technology”. In approving the methodology, the Board noted that the 

specifics of the methodology ensured amongst other things that the 

potential for the application in a particular geographical area would decrease 

as more such projects are registered under the CDM (EB 34, para. 

16 . http://cdm.unfccc.int/EB/034/eb34rep.pdf). 

The conclusion to the above seems to be that 

project developers prefer even more hierarchy 

than is presently provided through voluntary 

exchange (sticks instead of carrots). At the same 

time, the political system is discussing options 

for further standardizations and further ways of 

simplifying the additionality requirements without 

jeopardizing environmental integrity. 

Consequently the Board could be formally mandated 

to provide top-down methodology tools 

and standardization covering, e.g., renewable 

energy activities, demand-side energy efficiency, 

transport, agriculture, afforestation and reforestation, 

and other relevant areas. The CMP has 

already asked the Board to continue its efforts 

to broaden the applicability of methodologies. 14 

The Board could ask the secretariat to prepare 

relevant proposals (which to some extent it does 

already), involving external consultants and 

project developers organized in a representative 

way. 

In particular, tools could serve as building blocks 

for new approaches. In parallel, the traditional 

bottom-up approach should be maintained, al- 

14 Decision 2/CMP.3 para. 18 (b). 


65 


lowing for new ideas and concepts to be fed into 

the process. However, such ideas should not be 

fully developed by project participants but could 

be communicated to the Board for further development 

in a top-down mode. The Methodologies 

Panel continues as the expert advisor of the 

Board. 

The described model will most likely increase 

costs at the Board level. On the other hand, it will 

be seen as desirable by project participants and 

will involve less cost at that level. Thus, it might 

be neutral in terms of transaction costs (efficiency) 

while at the same time increasing both input 

legitimacy and compliance certainty and quality 

(output legitimacy). 

The only option will be to abolish the 

present review procedure and let the DOEs’ 

assessments be final, i.e. projects are 

registered and credits issued upon positive 

validation or verification by DOEs unless 

they are appealed against to the new body 

In the AWG KP, discussions are also being carried 

out into if and how objectives such as the 

promotion of sustainable development, the 

achievement of environmental and economic cobenefits 

and the transfer of technologies might 

be concretized by specific eligibility criteria. 

Implementing such concepts would necessitate 

the inclusion in methodologies of appropriate 

definitions and relevant criteria and indicators. A 

considerable effort would be needed to formulate 

these requirements in a sufficiently standardized 

way in order to maintain clarity and efficiency. 

6.2. Setting standards for accreditation 

and validation/verification services 

The number of cases where projects or credits 

are not automatically registered or issued because 

a review has been triggered by three Board 

members has substantially increased since spring 

2007. The main reason is the availability in early 

2007 of adequate Secretariat resources to support 

decision-making by Board members and the 

quality management control system put in place 

by the EB. 15 

This development has revealed some discrepancies 

in the perceptions of quality requirements 

between the Board and the DOEs. Consequently, 

all categories of stakeholders have expressed 

concern about the legitimacy and efficiency of 

the system. 

Procedurally, the Board’s decisions to undertake 

a review take into account inputs from the secretariat, 

including the view from an outside expert 

(RIT). They also take into account comments that 

project developers and DOEs are invited to submit 

on the basis of requests for review. If a review 

is decided, its specific scope is determined, and 

project developers and DOEs have the right to 

submit their views once again. 

A final decision has to be taken at the second 

Board meeting after the requests have been 

made. This means that registration or issuance 

is not delayed by more than a couple of months. 

Nevertheless, responding to the questions raised 

and possibly undertaking corrections might involve 

additional unforeseen costs for DOEs and 

project developers.. In the view of the private sector, 

reviews are seen as setbacks for predictability 

and manageability. On the other hand, the Board 

is ultimately responsible for the quality of the 

15 2007 EB-report paragraph 91 (d). 

66 


projects registered and, if in doubt, can only react 

by triggering a review. In order to ensure that 

review outcomes contribute to enhanced predictability 

over time, the CMP-3 has requested 

the Board to improve further the substantiation 

of its decisions in order to increase understanding 

of the underlying rationale by users. 16 

In the AWG KP the concern is raised about the 

DOEs assessing projects on behalf of the regulatory 

system while at the same being commercially 

connected to the project developers. The 

Board in its 2007 report to the CMP has already 

indicated, this situation might be perceived as 

potentially compromising. Consequently, a suggestion 

made within the AWG KP is to transfer 

the responsibility for selecting and paying the 

DOEs from project developers to the Board. This, 

of course, would need some procedural and management 

decisions. 

A more drastic suggestion is to abolish the whole 

accreditation system and let the secretariat perform 

the work currently undertaken by the DOEs, 

provided new, appropriately trained staff and resources 

are made available and an appropriate 

fee structure put in place. Such a model would 

go against the overall trend. Other comparable 

verification systems typically operate with independent 

verifiers and through direct arrangements 

between the verified and the verifier. 

Consequently, instead of eliminating the DOEs 

from the institutional framework, the challenge 

is for the Board to continue to strengthen its efforts 

to establish a common understanding of 

methodologies and requirements and to synchronise 

quality perceptions. The means are further 

clarity of system requirements (cf. the above section 

on methodologies) and a further strength- 

ening of accreditation requirements, supervision 

and response when standards are not met. Such 

means are common in comparable systems, and 

they have been partly put in place already or are 

presently being discussed by the Board. They 

comprise: 

• The CDM Validation and Verification 

Manual (VVM) as a standard for DOE’s 

work, which the Bali CMP requested to 

be made the highest priority. 17 The Board 

has considered a draft at EB 41 and EB 42 

(September 2008) but due to time constraint 

could not finalize its consideration 

and will continue its discussion at EB 43 

in October. 18 

• Common and operational accreditation 

and re-accreditation standards, taking 

into account past performance. A draft 

document on accreditation standards is 

made available for public comments September/October 

2008 and will be considered 

by at EB 44 in November. 19 

• Spot checks triggered, e.g. after a complaint 

by a DOE, an NGO or a stakeholder 

affected or initiated by the Board itself. 

A number of spot checks have already 

been undertaken and have resulted in important 

corrective actions by the DOEs 

involved. So far no suspension has been 

decided. 

• Regular surveillance of, e.g., the management 

and organization of DOEs, and 

other mechanisms to ensure auditor and 

technical competences of DOEs. This 

could be elaboration of standard reactions 

or sanctions by the Board in cases of 

equally standardized performance imperfections, 

with suspension as the ultimate 

17 Do para.15 (b). 

18 EB 42 report, para. 9. http://cdm.unfccc.int/EB/042/eb42rep.pdf 

16 Decision 2/CMP.3 para. 15 (e). 

19 Do.para. 10 


67 


sanction. At the same time the Board aims 

at incentivising improved performance by 

rationalisation of the present system of 

witnessing, spot checks and surveillance 

activities 20 . 

• Regular dialogue between the DOE Forum 

and the Board, such as the dialogues on 

the development of the VVM and on accreditation 

standards. 

• Disclosure by DOEs of rejections, i.e. 

their decisions not to submit projects for 

registration or not to request issuance. 21 

The result of such intensified efforts should result 

in validation reports and issuance requests 

by DOEs that correspond with the views of the 

Board. This would reduce the number of review 

cases, increase efficiency and make automatic 

registration and issuance the rule. At the same 

time, the issue of the contractual relationship 

would become less relevant. 

6.3. Reforming procedures for final 

decisions on registration and issuance 

A CER as a commodity is fairly unique. Consequently 

the creation of such a commodity has 

to be based on innovative thinking. In terms of 

governance, however, the CDM is comparable 

with other regulatory systems. But unlike many 

of these, it is not a traditional command-andcontrol 

system and does not contain the traditional 

separation of functions. It monopolises 

in one and the same body –the Executive Board 

– regulatory, executive and quasi-judicial functions. 

Stakeholders have expressed a concern 

that this implies a lack of transparency, consistency 

and predictability, while at the same time it 

can be perceived as involving possible conflicts 

of interest. Regardless of the rights of project 

20 Do.para. 11 and 13 

21 See Dornau, Carbon Finance, April 2008, p. 18. 

participants to submit comments to review questions, 

it is felt that the present system does not 

sufficiently safeguard the legal position of the 

project developers, who expect that their voluntary 

participation should be met with the right 

to present their case under normal rules of law, 

i.e. input legitimacy. 22 

As ex-chairman of the Board, I can confirm that 

the Board deals with review cases extremely thoroughly 

and carefully. It is also worth noting that 

recent reports suggest that decision-making by 

the Executive Board has become stricter over 

time, referring to increased insurnce that reductions 

are real, measurable and not least additional. 

23 Furthermore, successful implementation of 

the suggestions offered in the previous sections 

is expected to reduce significantly the number of 

review cases, thus increasing efficiency. This does 

not, however, solve the basic question of a separation 

of functions. Consequently, consideration 

could be given to establishing provision for a 

second opinion on the final decisions on registration 

or issuance, which at present can only be 

reversed after resubmission of the entire case. So 

far, this issue is not among the suggestions being 

discussed by the AWG KP. 

Possible ption could be to set up an Ombudsman 

system or an arbitration or appeals procedure, as 

exists in comparable systems. 

Normally, an Ombudsman is an official appointed 

by the government or by parliament (in the CDM 

context, it would be the CMP), who is charged 

with representing the interests of the public 

22 IETA’s 2007 report on the status of the CDM, different side events 

at COP 13/CMP3 on Bali, December 2007, Marcu at IETA side event on 

the CDM at SBs, 11 June 2008. 

23 E.g. Flues, Michaelowa and Michaelowa: UN approval of greenhouse 

gas emission reduction projects in developing countries, University of 

Zürich, Center for Comparative and International Studies Working Paper 

no. 35/2008, . 2008. 

68 


y investigating and addressing complaints reported 

by individual citizens. Introducing an 

Ombudsman has the disadvantage that his or 

her findings are typically non-binding recommendations. 

Consequently, the Executive Board 

could choose not to follow a recommendation 

to revisit its decisions. Therefore, it is questionable 

whether such a model would increase the 

legitimacy of the CDM governance system. Also, 

introducing an independent appeals body with 

specific legal expertise and a formal appeals procedure 

on top of the present system of review 

cases would be inefficient, adding an extra layer 

to the institutional system and definitely increasing 

transaction costs. In itself this might render 

participation in the CDM less attractive, in spite 

of the increase of input legitimacy. 

A simpler and more efficient model might be an 

appeals procedure covering procedural matters 

only. Such an appeals procedure is embedded in 

the procedures for accreditation in cases where, 

on the basis of a spot check, the Accreditation 

Panel recommends that a DOE be suspended. 24 

However, that model would not be satisfactory 

for project developers who were contesting the 

substance of the Board’s decisions, i.e.it does 

not add sufficiently to input legitimacy. 

Alternatively, an arbitration procedure could be 

set up with representatives of the EB, the project 

developers and DOEs, and possibly some independent 

individuals with a legal background. In 

such a model, the Board representative would 

have to assess the justification of his or her own 

decision in the Board, and the project developers 

and DOEs would equally tend to defend their 

original positions. Consequently, this model does 

not seem to be adequate. 

24 Procedure for accrediting operational entities, version 8, annex II 

(http://cdm.unfccc.int/DOE/cdm_accr_01.pdf). 

The challenge is to divide the Board’s functions 

and to refer the final decisions on registration 

and issuance to a separate and independent appeals 

body with legal expertise without at the 

No institutional changes beyond setting up an 

appeal body are needed. 

same time reducing efficiency. The only option 

will be to abolish the present review procedure 

and let the DOEs’ assessments be final, i.e. 

projects are registered and credits issued upon 

positive validation or verification by DOEs unless 

they are appealed against to the new body. 

This fits in with the expectations of more uniform 

perceptions of requirements between the 

Board and DOEs, as well as the expectation that 

final registration and issuance on the basis of the 

findings by the DOEs will be the rule (cf. the previous 

sections). Decisions which still might be 

contested are dealt with under normal rules of 

law by the appeals body, whose decisions will be 

final, substantiated and published. 

For the “new” Executive Board, this means that 

decisions to undertake reviews and subsequent 

decisions on the cases will be replaced by decisions 

whether or not to appeal against a DOE assessment. 

Otherwise the Board will continue to 

exercise its regulatory and executive functions. If 

the Board considers that rulings by the appeals 

body reveal the need to clarify or revise regulation 

e.g. on methodologies, it might do so with 

effect to future cases. Generally the Board will 

be able to devote more time and effort to these 

functions to interact on generic issues with the 

DOEs and with project developers on the basis 

of their respective positions and functions in the 

system. 


69 


For the project developers, this means that the 

demand to have a right of appeal against the decisions 

of the system to an independent body under 

rules of law will be met. The right of appeal 

would further be granted to another DOE, the 

DNA involved and UNFCCC-accredited observers 

with a particular interest in the case. 

Conclusion: the Executive 

Board as supervisor 

As a conclusion, the following elements might, 

considered as a package, be of inspiration in the 

further process of improving the governance of 

the existing project-based CDM: 

• Top-down standardization and development 

of methodology tools and standard 

setting for accreditation and DOE performance. 

• Final registration and issuance upon validation 

or verification by DOEs unless appealed 

against. 

• Appeals to be dealt with by a new independent 

appeal body, which will take the 

final decisions based on legal expertise 

concerning the conformity of cases with 

existing Executive Board regulations. The 

review process to be abolished. 

• The “new” Executive Board to continue to 

exercise its regulatory and executive functions, 

with the exception of decisions on 

registration and issuance. 

• 

The above changes would allow the Board to 

focus on and strengthen its supervisory role as 

foreseen by the Kyoto Protocol itself. This would 

also match existing competence requirements, 

which in collective terms are insight in the areas 

of climate change, of policy and of different 

geographic conditions. No institutional changes 

beyond setting up an appeal body are needed. 

From an efficiency perspective, top down activities 

will increase costs at Board level while abolishing 

the review process will decrease costs. At 

the project-developer level, costs will decrease 

for their own activities, and new costs will arise 

only from the appeal system. At the same time, 

the appeal system will increase input legitimacy, 

which in itself might increase the acceptance of 

the mechanism and hence increase activity and. 

in the end, output legitimacy. Of course, the 

modalities and procedures for the appeals body 

have to be more closely considered. 

The only remaining issue is that of possible compensation 

for Board members and alternates 

corresponding to their work load. But this will 

automatically come up as soon as appeal body 

members claim compensation on their part. 

Hans Jürgen Stehr is the director of an independent 

commission on climate change policy established by the 

Danish Government to examine how Denmark can reduce 

and ultimately eliminate dependency on fossil fuels. He has 

served in the CDM Executive Board since it was established 

in Marrakech in 2001, including two terms as Chair. 

Contact: hjs.cdm@gmail.com 

70 



71 


72 


Benoît Leguet, 

Mission Climat of the Caisse des 

Dépôts 1 

Ghada Elabed, 

University of California at Davis 

A reformed CDM to increase supply: 

Room for action 

Abstract 

3,700 CDM projects are in progress in developing 

countries estimated to reduce emissions by a 

potential 2.7 billion tons of CO 2 

until 2012. 

However, the success of the CDM has put the 

system under strain: the estimated supply by 2012 

could be as low as 1.8 billion tons of CO 2 

. To 

enhance the capacity of the mechanism to increase 

emissions reduction efforts in developing countries, 

in particular in the energy and agricultural 

sectors which will eventually play a large role 

in abatement, we recommend the development 

of simplified and objective additionality tests, 

top-down methodologies and the reform of 

the validation and verification procedure. 

Introduction 

While the success of the Clean Development 

Mechanism (CDM) has been praised by many 

observers, the mechanism faces today a number of 

challenges: increasing delays, difficulty in finding 

auditors to certify projects, and a great number of 

uncertainties for project developers (Schneider 

2007, Sterk 2008, Wara & Victor 2008). These 

challenges are the price of success: 3,700 CDM 

projects are in progress in developing nations. 

These projects could potentially abate emissions 

by 2.7 GteqCO2 by 2012. The number of CDM 

projects is growing and is putting the mechanism 

to the test. 

Based on analysis of risks and delays in the 

CER generation process, we propose certain 

procedural modifications within the existing 

institutional and methodological frameworks to 

enable the CDM to realize the sizeable emission 

73 


eductions necessary to combat climate change 

and to quench the thirst for Certified Emission 

Reduction (CER) credits stemming from the 

Annex B countries and the European Union 

Emission Trading Scheme (EU ETS). 

In the first section of the article, we examine the 

principal characteristics of the projects currently 

in the CDM pipeline. We then examine in detail 

the implications of delays and bottlenecks in the 

process of generating CERs. The pre-2012 supply 

we evaluate at 1.8 billion CERs compared to the 

2.7 billion tons of CO 2 

potentially abated by the 

mechanism by 2012. This assessment hints at 

various ways to reform and improve the CDM from 

2013 onwards: standardized methods of proving 

additionality; top-down methodologies and a 

reformed validation and verification process. 

Ensuring the success of the CDM in the post- 

2012 world is not only about lowering the cost of 

compliance for Annex I countries and involving 

today’s non-Annex I countries. It is also about 

setting a standard for project-based mechanisms 

that could help build an ambitious international 

climate regime for tomorrow. 

Potential supply of 

CERs through 2012 

A large potential, few countries, 

few technologies 

According to the information available in the 

UNEP-RISOE CDM/JI Pipeline, 1 over 1,100 

projects have already been registered by the 

United Nations that could yield 1.3 GtCO2 of 

abatement by 2012. 

1 Source: UNEP-RISOE CDM/JI Pipeline, August 2008 (unless specified). 

The data does not take into account new projects that will enter the 

pipeline between today and 2012. 

Abatement through the CDM is focused on a 

relatively small number of technologies, often 

involving non-CO 2 

greenhouse gases with potent 

global warming potentials and potentially low 

abatement costs. While more than a hundred 

methodologies have been approved by the CDM 

Executive Board (CDM EB), 10 methodologies 

alone are expected to generate 80% of the 

potential CERs before 2012. Incineration of 

HFCs and N 2 

O should yield more than a quarter 

of all emission reductions in the CDM by 2012; 

capture and destruction of methane should 

account for roughly a quarter of the abatement. 

Nevertheless, more diversified technologies to 

avoid emissions of CO 2 

are also present: renewable 

energy projects (one methodology covers at least 

eight sub-types of technologies) should account 

for one third, and energy efficiency for one tenth, 

of the emission reductions until 2012. 

By mid-2008, 70 countries had submitted at least 

one CDM project to the UNFCCC Secretariat. 

By 2012, roughly 80% of the potential CERs 

generated by projects currently in development 

should be generated in the Asia-Pacific region, 

and one fifth in Latin America. Around half of 

the abatement should take place in China, 15% 

in India and 7% in Brazil. Five countries alone 

– China, India, Brazil, South Korea and Mexico 

– should account for more than 80% of the 

abatement from CDM projects by 2012, which 

indicates that a limited number of countries will 

actually participate actively in the CDM. 

According to the World Bank, China was 

responsible for three fourths of all CDM 

transactions in 2007. The success of CDM in 

China is largely due to the country’s size and 

attractiveness, and to the early start it took by 

developing, among others, several large projects 

based on incineration of industrial gases. On the 

opposite end of the spectrum lies Sub-Saharan 

74 


Africa, with only 2.7% of the potential credits 

until 2012. The bulk of the Sub-Saharan projects 

are hosted by only four countries: Nigeria, South 

Africa, Ivory Coast, and Kenya. 

The two faces of CDM: Large-scale 

and small-scale projects.2 

The previous paragraphs might lead the reader 

to conclude that the typical CDM project is a 

large-scale non-CO2 industrial gas destruction 

project in China. This conclusion is partially 

correct. Because large-scale projects involve 

low abatement costs and generate significant 

amounts of CERs, project developers are willing 

to spend money on the lengthy CDM process, 

which involves developing a methodology and 

Project Design Document (PDD), hiring auditors 

to validate the PDD, paying the registration 

fee, abating emissions, measuring emission 

2 This section is partially based on Joergen Fenhann’s (UNEP Risoe) 

article: Carbon Finance, 19 May 2008: « Why are there so many smallscale 

projects? » 

reductions, and again hiring auditors to verify 

the emission reductions. As a result, large-scale 

projects have historically been among the first 

projects to emerge. 

However, more than 1,600 small-scale projects – 

which generate less than 60 000 CERs per year 

– are also being developed (see Figure 1). These 

types of projects represent 45% of all projects 

under development and could yield 245 million 

CERs by 2012. Small-scale projects enjoy some 

flexibility in the registration process that reduce 

transaction costs: a simplified PDD development 

process, simplified modalities for monitoring 

emission reductions, a reduced registration fee, 

and bundling of similar projects to reduce the 

share of fixed costs. 

Fenhann (2008) points out two elements - 

among others - that could explain the popularity 

of small-scale projects. First, while large-scale 

methodologies must be proposed by project 

developers and approved by the CDM EB in a 

Figure 1 – Breakdown of large- and small-scale projects by type 

Source: UNEP RISOE CDM/JI Pipeline Analysis and Database, 1 August, 2008. 


75 


ottom-up process, small-scale methodologies 

are approved in a top-down process. This triggered 

the emergence of small-scale projects in 

The number of CDM projects is growing 

and is putting the mechanism to the test. 

sectors for which small-scale methodologies 

- but no large-scale methodologies - had been 

approved. This was in particular the case for 

the 594 hydroelectric projects and 414 biomass 

projects, which together could yield 161 million 

CERs by 2012. 

A second factor seems more decisive: the characteristics 

of the projects, and the political and 

technical environment in the host country. HFC, 

N 2 

O and landfill gas projects are by nature largescale. 

Some projects are also by nature smallscale, 

in particular in the renewable energy sector: 

wind, solar, hydro and biomass. In this context, 

the political and technical environment in the 

host country seems to play a major role. Of the 

158 small-scale wind projects being developed 

in the world, 138 are hosted by India; 309 of 

the 504 small-scale hydro projects are hosted 

by China; and of the 328 small-scale biomass 

projects, 201 are Indian, 42 Brazilian and 23 

Malaysian. Malaysia has also developed around 

30 projects for composting oil palm residues. 

These elements seem to indicate that political 

will – and a favourable regulatory, technical 

and economic environment – can lead to the 

emergence of clusters of small-scale projects 

that can be at least partly financed through the 


A closer look at the supply 

An assessment of the real supply by 2012 

Having a project registered and 

credits generated is risky 

The principle behind the CDM is in theory extremely 

simple: any project that can be implemented 

thanks to the emerging carbon price and which 

generates an effective reduction of GHG emission 

of one ton of CO 2 

may claim a CER. However, in 

practice it is unfortunately not that simple. 

For the UNFCCC, the life of a CDM project begins 

the day the Project Design Document (PDD) 

is submitted to the public for comment. The PDD 

must then be approved by the host country, validated 

by a Designated Operational Entity (DOE) 

and registered by the CDM Executive Board 

(CDM EB). Once the project has been registered, 

it is eligible to generate CERs. Abated emissions 

must be monitored and verified by a DOE 

throughout the lifetime of the project. Once the 

emission reductions are verified, the CDM EB issues 

the corresponding CERs. 

The discussion in previous sections assumed 

that all emission reductions set forth in PDDs 

will actually generate CERs. Unfortunately, this 

is not the case. Delays and bottlenecks in the 

process will trim the potential amount of CERs 

that will be available before 2012. 

From the public UNFCCC data, we could not 

find any evidence of a PDD submitted for 

validation that was not approved by a host 

country. Along the registration process, it can 

thus be reasonably assumed that a host country 

will systematically approve all projects that have 

their PDD submitted to the UNFCCC: first, it is 

in the country’s interest to approve a project, as 

long as it complies with the national sustainable 

76 


development strategy; second, since drafting a 

PDD is costly, it is likely that project developers 

engage in discussions with the host country’s 

designated national authority while drafting the 

PDD. However, there were delays in approving 

projects varying from one week (Qatar) to 17 

months (Uruguay). 

Figure 2 – From reducing emissions to generating CERs: associated 

risks and delays 

PDDs 

P ro je c ts a t v a lid a tio n fo r 

m o re th a n o n e y e a r 

P ro je c ts a t v a lid a tio n fo r 

All PDDs approved by the host country are not 

necessarily validated by the DOEs and approved 

by the CDM EB. Several projects have been 

rejected during this process. Even if a project 

is approved by the CDM EB, the potential to 

generate CERs mentioned in the PDD might not 

be achieved for technical reasons: for example, 

if the implementation of the project is delayed 

or if its operation is suboptimal. On the other 

hand, a project might generate more CERs than 

originally envisaged in the PDD. 

le s s th a n o n e y e a r 

V a lid a te d 

p ro je c ts 

(in c l.re je c te d 

a n d 

w ith d ra w n ) 

b u t n o t y e t 

re g is te re d 

R e g is te re d 

p ro je c ts , n o 

C E R s is s u e d 

4 

3 

2 

All these risks make the CER generation process 

resemble a funnel. See Figure 2. A great number 

of PDDs go into the funnel, but a much smaller 

number actually generate CERs as an end product. 

Delays due to bottlenecks, present in each step of 

the registration and issuance processes, lengthen 

the funnel and reduce the supply of CERs that 

will be available before 2012. 

R e g is t e re d 

p ro je c ts , 

C E R s is s u e d 

CERs 

5 

Methodology used to assess the supply 3 

To account for the risks faced by CDM projects 

and to estimate the real number of CERs that will 

be available, we evaluated the potential amount 

of CERs generated by a given project based on 

the data available in the PDD and in the UNEP/ 

RISOE CDM Pipeline for each month in the 

period from January 1 st , 2000 to April 30 th , 2013 4 

and applied four corrective factors: 

3 For a full explanation of the methodology, see Elabed & Leguet 

(forthcoming). 

4 The date of April 30 th , 2013 was chosen as it corresponds to the end 

of the second commitment period of the EU ETS, today’s main source of 

demand for CERs. 

Source : Mission Climat of the Caisse des Dépôts, 2008. 

• A “pre-validation factor” which measures 

the probability for a project to be 

validated within a year. Historically, 85% 

of all validated projects were validated 

within a year, and projects that remained 

at the validation stage for over a year 

were unlikely to be ever validated. 

• A “validation factor” which measures the 

probability for a project that began the 


77 


validation process less than a year before 

to be validated by the DOE. 

• A “registration factor” which measures 

the probability for a project that has been 

validated by a DOE to be registered by the 

CDM EB. 

• A “generation factor” which measures 

the probability for a project using the 

registered by the CDM EB to generate 

the amount of CERs mentioned in the 

PDD. 

Three delays are also applied to the estimate, 

based on observed historical delays: 

• The delay from the day the PDD is 

submitted for comments and the request 

for registration; 

• The delay from registration request to 

registration; 

• The delay between the date of the 

marginal emission reduction that 

generated a CER and the issuance of the 

corresponding CER. 

Additionally, an estimate of the new projects 

entering the pipeline until 2012 is carried out 

by observing historical trends by country and by 

sector. 

The long and winding road to CERs 

Bottlenecks increase delays 

Some bottlenecks are apparent in the process. 

The first observed bottleneck is the delay in 

project approval by the host country. This delay 

seems to be increasing for several countries, in 

particular for China, as the number of projects 

applying for approval increases. The second 

bottleneck is the validation of the project by 

DOEs: the validation process takes anywhere 

between 58 and 520 days, depending on the 

country, with eight months on average. This 

may be explained by the fact that DOEs are 

understaffed. They are losing auditors to project 

developers and CDM boutiques and it takes time 

to train qualified auditors. The third bottleneck 

is the CDM EB: the CDM EB issued CERs for the 

first time in October 2005. In 34 months, only 

7% of the potential CERs up to 2012 have been 

issued. With less than five years to go, a potential 

2.5 billion CERs have yet to be issued and it is 

uncertain whether the CDM EB can cope with 

the associated extra workload. This may indeed 

prove not to be the case, as new projects keep 

entering the pipeline every month, at an average 

rate of 120 new projects per month. In 18 

months, the number of projects at the validation 

stage has multiplied by 2.5, and reached 2,255 

projects in June 2008. During the same period, 

only 700 projects were registered (see Figure 3). 

Not every ton will become a cer… 

Throughout the process of turning the potential 

abatement of one ton of CO 2 

into a CER, the 

first hurdle is the “pre-validation factor,” which 

estimates the time necessary for the host country 

to approve the project. Upon applying this 

factor, we find that 25% of the Chinese projects 

(400 projects) and 20% of the Indian projects 

(roughly 300 projects) currently in the pipeline 

might never yield CERs. The second hurdle to 

overcome is the “validation factor”. Only twothirds 

of the projects in development could be 

validated. The third hurdle is the “registration 

factor”. This factor measures the probability 

for a validated project to be directly registered, 

and seems to depend greatly on the sector or 

the methodology used. In particular, validated 

energy efficiency projects – about which the EB 

has expressed concern regarding additionality 

– account for more than half of the projects 

that are either rejected or reviewed by the CDM 

EB. The last hurdle to overcome is the actual 

generation of CERs. An emissions abatement 

project may under- or over-perform as compared 

to the provisions outlined in the PDD. While the 

78 


Figure 3 – Evolution of the CDM Pipeline (count: number of 

projects) 

the end of the second compliance period of the 

EU ETS, the primary source of demand for CDM 

credits. This estimate does not fundamentally 

modify the balance of credits generated by 

country: China should still be the largest 

supplier of CERs, providing 50% of all CERs by 

April 2003; 75% of all CERs will be generated by 

only three countries (China, India, and Brazil), 

and 90% by only ten countries (see Figure 4).. 

Source: UNEP/RISOE CDM Pipeline, 1 August, 2008. 

average registered CDM project yields 94% of 

the emission reductions it intends to produce, 

this average hides differences among sectors. 

Industrial gas incineration projects achieve over 

100% of their intended abatement and energyrelated 

projects achieve between 60-80%, where 

as cement, steel, agriculture and transportation 

projects deliver only roughly 50% of the emission 

reductions planned in the PDD. 

Around 1 billion CERs could be generated by only 

three methodologies: AM1 (incineration of HFC), 

ACM2 (grid-connected electricity generation 

from renewable sources) and AM21 (incineration 

of N 2 

O); and 75% of the expected supply would 

come from only eleven methodologies. Energy 

projects such as renewable energies, fuel switch 

and energy efficiency on the production side 

should generate 45% of all CERs by 2012. On 

the whole, energy efficiency projects, either 

demand- or production-side, should represent 

12% of all CERs. Incineration of HFCs, N 2 

O and 

Figure 4 – Breakdown of estimated supply of CDM projects 

by country (Total: 1.8 billion CERs) 

Our assessment: 

1.8 billion CERs 

Data extracted from the UNEP/RISOE CDM 

Pipeline indicates a potential supply of 2.7 billion 

CERs by 2012. However, our estimate, taking 

into account the abovementioned bottlenecks 

and factors, is that only 1.8 billion CERs will 

effectively be generated by April 2013, this being 

Source: Mission Climat of the Caisse des Dépôts, based on UNEP/RISOE 

Pipeline data, 1 August, 2008 


79 


PFCs should yield roughly 40% of the CERs, while 

fugitive methane projects such as pipelines, coal 

mine methane and landfill gas should account 

for 10%. 

Recommendations 

for the CDM 

Our analysis suggests that while the current CDM 

should result in significant emissions reductions 

of 1,8 Gt through April 2013, it will not realize its 

full potential of generating 2,7 Gt of reductions. 

The difficulties faced by the current mechanism 

should only marginally impact the development 

of non-CO 2 

industrial gas reduction projects. 

On the other hand, they place at great risk the 

growth in projects in other sectors, among others 

energy production and agriculture. Projects in 

these other sectors will eventually make up the 

bulk of CDM projects, as the potential for HFC 

and N 2 

O projects is dying out. If we seek to make 

the CDM an instrument that can help achieve 

significant emissions reductions in developing 

countries and serve as a key building block for 

the post-2012 international climate regime, we 

must improve its ability to perform. 

Three main recommendations emerge from our 

observation of the bottlenecks, risks and delays 

observed during the CDM project approval 

and verification process that may be used to 

strengthen and enlarge the mechanism: (1) use 

simplified and objective additionality tests; (2) 

develop methodologies in a top-down process; 

and (3) improve the validation and verification 

process. 

A. Use simplified and objective 

additionality tests 

Doubts have been raised by some observers as to 

the questionable additionality of some projects 

and the need to tighten criteria for proving 

additionality (see for example Michaelowa 

and Purohit, 2007; Schneider, 2007; Wara and 

Victor, 2008). These studies have focused on 

possible “false positive” projects i.e. possibly 

non-additional projects that do get registered. 

Surprisingly little material can be found on “false 

negative” projects i.e. possibly additional projects 

that do not get registered. This may be because 

these false negative projects are by definition 

never developed. There is unfortunately an 

inherent information asymmetry between the 

project developer and the DOEs, and efforts 

to tighten the criteria for proving additionality 

might actually have adverse effects, as they would 

increase costs, delays and risks, and possibly 

increase the number of false negatives. 

On the contrary, additionality tests should be 

simplified and based on objective criteria, such 

as a positive list of technologies or technology 

standards, technology penetration rate and 

sectoral benchmarks, rather than on the existing 

tools. This would make it easier for the DOEs to 

validate projects, and easier for the CDM EB to 

assess the work of the DOEs. On the negative side, 

such lists, rates and benchmarks would require 

a significant amount of time to agree upon and 

could turn out to be very data-intensive. But in 

the longer term, the costs of the system would 

certainly decrease. At the same time, the number 

of false positives would, also, most likely increase. 

It should be borne in mind that two similar 

approaches can be used to decrease the amount 

of potentially non-additional CERs that enter the 

market. First, some approaches for discounting 

CERs generated by projects whose additionality is 

80 


not certain have been proposed (see for example 

Lambert, 2007). Second, potential windfall 

profits can be taxed away, and the proceeds used 

to fund climate-friendly projects such as projects 

that reduce emissions or climate change-related 

research. This is what the Chinese government 

appears to be doing with the sustainability tax it 

set up, whose proceeds feed the Chinese CDM 

Fund. 

Simplified and objective additionality tests 

would gradually shift the debate from a projectby-project 

assessment to the assessment of 

programs or even policies. The real long-term 

benefit of a reformed CDM should in essence be 

to provide incentives for low-carbon investment 

by favouring the development of national 

policies and regulations. As we mentioned 

previously, the success of small-scale projects 

despite supposedly higher relative transaction 

costs indicates that political will, associated with 

a favourable regulatory, technical and economic 

environment, can lead to the emergence of 

clusters of emission-reducing projects. This 

is a good omen for programmatic CDM and 

could also provide a testing ground for policybased 

CDM pilot projects based, for example, on 

biomass in India or small hydropower in China. 

Sterk, 2008). Top-down methodologies could 

prove especially efficient for technologies 

that have a low penetration rate, such as CCS 

or energy efficiency projects. The challenge 

would obviously lie in agreeing on thresholds 

for the technology penetration rates, sectoral 

benchmarks, etc. 

C. Improve the validation and 

verification process 

In the current CDM, the CDM EB is secondguessing 

the validation work carried out by 

the DOEs with the help of the experts of the 

Registration and Issuance Team. This process 

takes time and may partially explain the 

bottleneck observed in the registration process. 

Furthermore, review requests and rejections of 

validations based on the assessment of experts 

could undermine the process in the long run, 

since DOEs could then become very selective in 

Simplified and objective additionality tests 

would gradually shift the debate from 

a project-by-project assessment to the 

assessment of programs or even policies 

B. Develop methodologies 

through a top-down process 

Another reform that might be considered – 

and is hinted at by the success of small-scale 

projects – is developing methodologies using a 

top-down rather than a bottom-up framework. 

These types of methodologies, developed for 

a limited number of sectors, should include 

additionality tests based on objective criteria 

including, as previously mentioned, technology 

or technology standard, technology penetration 

rate and sectoral benchmarks (see for example 

the projects they choose to validate. This could in 

turn deter project developers in some sectors for 

which the proof of additionality or other elements 

in the PDD are too subjective, in particular energy 

efficiency projects. The registration process 

pursued by the CDM EB should rather focus on 

ensuring that an adequate validation protocol 

has been followed. In this respect, the Validation 

and Verification Manual (VVM) currently being 

developed by the Board is a good starting point. 

Additionally, the experts of the Registration and 


81 


Issuance team could perform their review before 

that of the DOEs, since they have the sectoral 

and technical expertise that DOEs lack in certain 

cases. Hence, they can provide technical input 

to the DOEs for use in the validation process, 

rather than following the work of the DOEs and 

possibly contradicting their validation work. If 

this option is pursued, it would be necessary to 

pay the experts either by the DOEs or by an ad 

hoc fund. 

Our three recommendations are to develop 

simplified and objective additionality tests, 

top-down methodologies and to reform the 

validation and verification procedure. 

In a very similar way, the verification process 

could be improved. The CDM EB may focus on 

checking that an adequate verification protocol 

has been followed. The goal of verification should 

not be to check the occurrence of every emission 

reduction claimed but rather to make sure that 

the risk of overestimating emission reductions is 

properly managed. Two initiatives of the CDM 

EB are promising in this respect and should be 

pursued: the previously mentioned Validation and 

Verification Manual and programmatic CDM, for 

which random sampling of the individual CDM 

Programme Activities is allowed for verification 

(UNFCCC, 2007). The voluntary market could 

also be a source of inspiration: the Voluntary 

Gold Standard has set up a system whereby a 

share of proceeds from every project goes to a 

fund managed by the Standard. The purpose of 

the fund is to pay the verifiers to randomly verify 

projects. Setting up a similar system for the CDM 

would, apart from reducing overall verification 

costs, address the concerns of some stakeholders 

that DOEs have a strong incentive to validate 

any project because they are paid by the project 

developer and not by an independent body 

managed by the UN. It would also help address 

the looming bottleneck at the verification stage 

due to the lack of trained auditors. 

In a nutshell, the CDM EB should rely more 

on the DOEs, which are supposed to work for 

and not against the EB. Governments have 

long understood that verifying income tax 

declarations is costly, hence they have taken a 

risk-based approach to spot tax evasion by using 

random sampling in the verification process. If 

CO 2 

is to become the 21 st century’s currency, the 

same approach could be used to the benefit of 

the atmosphere. 

Outlooks 

In eight years, the CDM has achieved a 

considerable task. First, in environmental terms, 

it should reduce emissions until 2012 by roughly 

1.8 billion tons of CO 2 

. More importantly, it 

has become today’s standard for project-based 

mechanisms, which even critics of the mechanism 

admit (see for example Wara and Victor, 2008). 

However, the success of the CDM has put the 

system under strain. Multiple bottlenecks have 

appeared and must be remedied in order to 

enhance the CDM’s capacity to increase emissions 

reduction efforts in developing countries. Our 

three recommendations are to develop simplified 

and objective additionality tests, top-down 

methodologies and to reform the validation and 

verification procedure. These recommendations 

seek to expand the scale of the CDM among others 

in the energy and agricultural sectors. Eventually 

these sectors will play a much larger abatement 

role than the “low hanging fruits” of non-CO 2 

industrial gas abatement, which contributed to 

the early development of the CDM. 

82 


The road to Copenhagen and beyond is clear: the 

CDM crediting process should be streamlined 

and the mechanism should be enlarged. 

Expectations are high: some of the legislative 

proposals discussed in the US Congress include 

provisions for using international offsets. 

Equally, the European Commission’s proposal 

for the post-2012 EU ETS – which is today 

by far the main source of demand for CERs - 

includes a provision for crediting projects that 

reduce emissions outside of the scheme. Such a 

provision could either supplement the CDM or 

replace it in case it fails to deliver. If the CDM 

succeeds in remaining the prevailing standard, it 

could help link the EU ETS with emerging carbon 

trading schemes in other nations, including a 

future American effort. Food for thought and 

room for action! 

References 

Elabed G & Leguet B (forthcoming), “The Clean Development Mechanism: 

How many carbon credits by 2012?”, Climate report, Mission climat 

– Caisse des Dépôts. 

Fenhann J (2008), “Why are there so many small-scale projects?”, Carbon 

Finance, 19 May 2008. 

Michaelowa A & Purohit P (2007), “Additionality Determination of Indian 

CDM Projects: Can Indian CDM Project Developers Outwit the CDM 

Executive Board”. 

Schneider L (2007), “Is the CDM fulfilling its environmental and sustainable 

development objectives? An evaluation of the CDM and options for 

improvement”, Öko-Institut, report for the WWF. 

Sterk W. (2008), “From Clean Development Mechanism to Sectoral Crediting 

Approaches – Way forward or Wrong Turn?” JIKO Policy Paper. 

UNFCCC (2007), “Guidance on the registration of project activities 

under a programme of activities as a single CDM project activity”, Annex 

38 to the minutes of the 32 nd meeting of the CDM EB. 

Wara M. & Victor D. (2008), “A Realistic Policy on International Carbon 

Offsets”, PESD Working paper #74. 

Benoît Leguet is a Project Manager for Mission Climat, a 

research and analysis center on carbon economics at the 

Caisse des Dépôts in Paris, France. His research is currently 

focused on project-based mechanisms, investment in carbon 

assets, and carbon neutrality, and was a lead contributor to 

the CDM and JI guides published by the French government. 

Contact: BENOIT.LEGUET@caissedesdepots.fr 

Ghada Elabed is a member of the Mission Climat team 

conducting research and analysis on project-based 

mechanisms linked to the Kyoto Protocol, mainly the Clean 

Development Mechanism. She is an agronomic engineer 

with a Masters degree in Environmental Economics. 

Contact: Ghada.Elabed@caissedesdepots.fr 


83 


84 


By Søren E. LütkenPh.D 

General Director of Caspervandertak 

Consulting Beijing 


Developing Country Financing for 

Developed Country Commitments? 

How to deal with the challenges of the prevailing unilateral 

financing of CDM projects and the lack of technology transfers? 

Abstract: 

The CDM has so far almost exclusively thrived 

on local non-Annex-I financing and technology. 

To alter this situation, changes in the modalities 

for CDM are needed. Such changes must 

address those corporate interests that see 

emission reductions as an opportunity. These 

are not the emission constrained entities located 

in Annex-I countries. To improve the ability 

of CDM to respond to its original purpose 

three options are proposed: Deregulate CDM 

to promote (foreign) investor confidence in 

the mechanism; introduce foreign (Annex-I) 

technology requirements in the CDM projects; 

and/or establish a sector-based governmentto-government 

model that includes technology 

development, transfer, and deployment agreements. 

Despite initial assurances to the contrary, 1 it 

is generally overlooked that CDM rests almost 

entirely on investors in developing countries 

being willing to put up the finance for projects, 

that through the generation of Certified Emission 

Reductions (CERs), help developed country 

emitters avoid having to make such investments. 

Instead, developed country emitters are being 

offered non-investment-based ‘commodity cre dits’ 

(i.e. CERs) from projects that, from an investment 

perspective, are in many cases comparable to 

similar projects in an Annex-I context. For example, 

1 It is actually not possible to find specific references in the Protocol 

or the Accords regarding exactly who is supposed to fund which kind 

of project. The only evidence is records of positions prior to the actual 

establishment of the CDM in Kyoto, as well as interesting exchanges of 

questions and answers between the EU, the Umbrella Group and the EU 

Commission (see FCCC/CP/1998/MISC.7 at http://unfccc.int/resource/ 

docs/cop4/misc07.htm) after COP3 clearly spelled out that the focus 

for CDM was to increase FDI for emissions-reduction projects (see also 

Lütken & Michaelowa (2008) pp. 9ff.). 

85 


erecting a wind farm in China is not significantly 

cheaper than doing so in Spain. This was neither 

the intention nor the expectation regarding the 

CDM. Rather, the CDM was supposed to generate 

additional investment flows from Annex-I countries 

with high abatement costs to non-Annex-I 

countries with inefficient power supplies, 

industrial production and other deficiencies, 

thus creating the potential for exploiting lower 

marginal abatement costs. 

Compared to the still absent foreign investor, 

the motivation for local investors to adopt 

non-domestic technologies on normal 

commercial terms is limited…..Therefore, 

unsurprisingly, the CDM also has a hard 

time promoting any technology transfer. 

The effect of this is that the financial flows from 

Annex-I to non-Annex-I countries that were 

expected on the basis of calculating the so-called 

‘marginal abatement costs’ are considerably 

lower than originally anticipated. Compared to 

the still absent foreign investor, the motivation 

for local investors to adopt non-domestic technologies 

on normal commercial terms is limited, 

being expensive, unfamiliar or even unknown. 

Therefore, unsurprisingly, the CDM also has a 

hard time promoting any technology transfer. 

When we look at improving the reach, quality 

and sustainability of the CDM in a post-2012 

setting, we should first of all ask ourselves if we 

are happy with the situation as it stands. If not, 

what would be the most appropriate corrective 

action? This article assumes that, presented 

with the above facts, none of the parties at the 

negotiating table should be happy with the 

present situation. Therefore, the article presents 

options for potentially significant changes to 

the regulations governing the CDM. As step one, 

it demonstrates that distinguishing between 

threat and opportunity as investment drivers 

has a high degree of explanatory effect for the 

actual records of the market, i.e. that financial 

unilateralism must be expected in a marketbased 

structure like CDM because it is designed 

to promote the pursuit of opportunity, whereas 

emission constraints are treated as a threat by 

the targeted Annex-I corporations. 

The article discusses briefly the implications of 

unilateral investment mainly for additionality 

determination before moving to a presentation 

of three options for countering the situation: one 

includes the option of abolishing the additionality 

test altogether; the second formalizes technology 

transfer as a requirement for CDM registration; 

and the third introduces technology agreements 

as a basis for sectoral approaches. 

To avoid misunderstandings of the message 

in this article, please note that use of the term 

‘unilateral financing’ should not be confused 

with the normal understanding of unilateral 

projects, which only refer to the existence of an 

emissions reduction purchase agreement at the 

time of registration with the Executive Board. 

Unilateral financing refers to the financing of the 

underlying asset, which only rarely stems from 

Annex-I parties. 

Background 

There are no specific statistics on the involvement 

of bilateral investment in CDM projects, and 

there is no requirement for project hosts to 

indicate the specific financing model for the 

project in the PDDs. However, most PDDs reveal 

what kind of involvement there is by Annex-I 

86 


parties. A survey of the first 628 registered CDM 

projects indicates that projects are generally 

unilaterally financed. It also provides evidence of 

the kind of Annex-I country companies that do 

invest in CDM projects, and of the geographical 

distribution of bilateral investment activities, 

however small they may be. 

Of the 628 projects, 48 more or less explicitly 

seem to involve foreign investment capital (there 

is uncertainty attached to the figures because 

the investment models are not disclosed). The 

48 projects are distributed among 29 different 

investors. Among those that have invested 

more than once are Agritech, Union Fenosa, 

Ecosecurities, Lafarge, World Wide Recycling, 

Table 1. Capital flows for private infrastructure in developing countries, million US$ 

Investment 

Year 

Latin America 

South East 

Asia 

South Asia 

Middle East & 

North Africa 

Sub-Sahara 

Africa 

Total 

Investment 

1990 440 44 0 0 40 524 

1991 0 379 614 n.a. 0 993 

1992 5,140 4,128 20 0 0 9,288 

1993 2,857 5,578 1,051 2,927 0 12,413 

1994 4,076 6,823 2,075 205 76 13,255 

1995 6,457 8,371 2,809 0 77 17,714 

1996 9,639 11,063 4,079 0 428 25,209 

1997 22,912 13,435 1,469 4,608 754 43,178 

1998 18,916 5,190 1,291 1,620 715 27,732 

1999 10,611 5,176 2,593 858 585 19,823 

2000 14,382 3,502 2,414 150 451 20,899 

2001 6,239 4,178 960 2,182 713 14,272 

2002 7,423 3,461 396 30 484 11,794 

2003 7,171 9,735 843 360 1,297 19,406 

2004 3,325 3,769 4,235 1,199 56 12,584 

2005 4,562 6,294 1,384 400 1,359 13,999 

2006 7,144 2,626 2,953 2,336 616 15,675 

Grand Total 131,294 93,753 29,185 16,875 7,649 278,756 

Source: Public-Private Infrastructure Advisory Facility (PPIAF), World Bank. The Private 

Participation in Infrastructure Database (Accessed November 2007). 

Developing Country Financing for Developed Country Commitments? 

87 


Gamesa, Econergy, Panasonic and Mitsubishi. 

Japanese investors seem to focus on Asia, while 

the rest have a significant majority of activities 

in Latin America: there are 19 projects in Asia, 4 

in Africa and 25 in Latin America. Most projects 

seem to be joint ventures, for which the capital 

distribution between the local company and the 

foreign investor remains undisclosed. 

The 48 projects correspond to 7–8% of the total 

portfolio or the normal approximately 10% share 

of FDI in the Gross Fixed Capital Formation 

(GFCF) of developing countries. Thus, there is 

no evidence that FDI has increased for projects 

related to CDM compared to normal investment 

flows. Another important observation is that most 

investors are technology providers in pursuit of 

opportunity. Those who are not are industrial 

corporations with existing operations in the 

host non-Annex-I country, i.e. they align the 

CDM opportunity with their existing business 

strategies. 

There is obviously no trace of any 

significant foreign investment effect 

of CDM – at least not so far 

The evidence from this analysis is that more than 

90% of CDM projects are unilaterally financed, 

and only an insignificant share truly reflects 

the initial idea of Annex-I entities moving their 

investments to areas where the marginal cost 

of emissions reduction is lower than in their 

domestic markets. Further evidence of this is 

provided by looking at general investment flows 

for infrastructure investments in developing 

countries. The PPIAF (Private Participation in 

Infrastructure Advisory Facility) of the World 

Bank provides statistics for private participation 

in infrastructure in developing countries. This 

advisory facility was set up in response to the 

remarkable growth in FDI for infrastructure 

projects in developing countries during the 

1990s, but the trend suffered a serious setback in 

1998 due to the Asian financial crisis. Projects had 

started to emerge from practically zero in 1990 

as investment climates improved and financing 

techniques, including risk mitigation products, 

evolved to provide acceptable rates of return on 

the investments. The bubble burst, however, with 

the financial crisis, which revealed the fragility of 

the market and the incompleteness of regulatory 

mechanisms, procedures and traditions. 

This happened before Kyoto and – ironically – 

came to a halt just as the Kyoto Protocol came into 

being. According to the PPIAF programme, 2 private 

investment flows for energy projects (the most 

obvious area for emissions-reduction projects) 

in developing countries fell from approximately 

US$43 billion in 1997 to US$28 billion in 

1998. But the decline for the energy sector has 

continued ever since, while other infrastructure 

sectors (telecoms, water, and transport) have 

experienced more diverse fluctuations. The 

investment level for energy projects fell to US$19 

billion in 2003 and decreased further to US$15 

billion in 2006 or about a third of the level in 

1997. Further, Latin America is dominant in 

the statistics representing half or more of the 

investments, while investments in East and South 

Asia together dropped to only US$5 billion in 

2006, from US$15 billion in 1997. 

2 http://ppi.worldbank.org/explore/ppi_exploreRegion. 

aspx?regionID.1. 

88 


Investment motivation 

There is obviously no trace of any significant 

foreign investment effect of CDM – at least 

not so far. So why, despite the obvious lack of 

investment appetite for CDM on the part of 

emission constrained Annex-I entities, is CDM 

thriving more than ever? 

It all has to do with investment motivation. 3 

Corporate decisions related to emissions constraints 

take the form of a response to a threat (as 

opposed to the pursuit of an opportunity). this 

may be compared with taxation: allocation of fewer 

allowances than needed to emitting industries 

constitutes a kind of tax. 

Addressing such corporate threats requires managerial 

decision-making. Here, differentiation may 

be made between: 

- Informed decisions 

- Uninformed decisions 

- Informed non-decisions 

- Uninformed non-decisions. 

The non-decisions are rarely efficient responses 

to threats, but they do apply to the (lack of) 

pursuit of opportunities, typically taking the 

form of neglect. This should not be confused with 

addressing a potential threat through inaction. If 

a threat can be addressed through inaction, then 

inaction will be the actively decided strategy. 

Non-decisions are less fatal when linked to 

considering opportunities rather than addressing 

a threat. If a single corporation is observed in 

isolation, threats affect its existing core activities, 

whether it acts or not. Opportunities, on the 

other hand, only affect the strategic position of 

the corporation if they are exploited. Therefore, 

threats need to be addressed more urgently than 

opportunities need exploiting. 

Investments in new markets, compared to existing 

ones, normally take the form of longerterm 

strategic investments due to the additional 

costs involved and the relative detachment 

from the national market. This is particularly 

true for obvious CDM potentials in largescale 

investments in energy infrastructure 

with long construction periods, long life-times 

and long payback horizons. It is not likely that 

such investments will be intended originally as 

stand-alone activities: they are rather part of 

a long-term strategy building on an analysis of 

long-term expectations in a given market. To 

exemplify with an essential quotation from a 

European power corporation: ‘If we had a power 

plant in India, we might consider a wind turbine 

there. But never a landfill. And not without the 

power plant’. This quotation poses two serious 

challenges to the expected willingness to pursue 

low-cost emissions-reduction opportunities in 

non-Annex-I countries: 1) the response to the 

emissions constraint will be linked to markets 

already addressed by the constrained entity and 

2) the possible investment will be restricted to 

technologies with which the investor is familiar. 

This constitutes significant limitations on the 

scope of possible CDM investment for the 

emission constrained entities. The message here 

is that, unless CDM investments can be linked to 

strategies that have already been developed for 

entering new markets, CDM in itself will not drive 

the investment. If, however, they can be aligned 

with already developed strategies, they will be 

taken on board as an additional consideration. 

3 The following is a brief description of decision processes, taken from 

work done by Butler et al. (1993) and further analysed in Lütken and 

Michaelowa (2008). 

But let us look at how such investment decisions 

are made. 


89 


Responses to threats 

Decisions made in response to a threat are 

different in character when compared to decisions 

relating to opportunities. Decisions concerning 

threats are made under a certain strain, which 

is not necessarily the case for the exploration 

of possibilities – although, of course, there are 

windows of opportunity. Threats are problems that 

need solving; potential investments are options 

that may be exploited. An employee presenting an 

investment proposal will be evaluated differently 

depending on whether the proposal solves a 

problem or opens up an opportunity. 

The presentation of an investment option is 

typically ‘emergent’: 4 there may or may not be 

a deadline, but it is only presented if and when 

employees believe it to be sufficiently attractive 

for them to gamble on their status in the 

corporation. It is a bottom-up process. Moreover, 

because an option is not (necessarily) critical 

to the corporation, it may – depending on the 

corporate culture – be more or less acceptable to 

think ‘out of the box’, i.e. not necessarily complying 

completely with core business strategies. 

If, on the other hand, there is a threat that needs 

addressing, there is often a deadline. Management 

most often reacts to an event or development 

that is external to the corporation. The typical 

demand will be a cost-efficient solution, but also 

a solution that is easily implemented. Employees 

typically deliver their proposal responding to 

requests from management. Hence, the process 

is top-down and ‘deliberate’. A solution that 

is proposed but dismissed does not make the 

problem go away: there has to be asolution. 

4 In an empirical study conducted in the UK in 1988 by Marsh et al., 

it was shown that ‘explicit strategic planning, even at a divisional level, 

[seems] to have only limited impact on the generation and approval of 

investment projects; it was more emergent than deliberate’ (Butler et al. 

(1993), p. 54). There seems to be no urgency involved. The corporation 

can afford non-decisions. 

An alternative must be sought, which increases 

the strain on both the corporation and the 

employees. The stakes are higher, the margin for 

error narrower. 

This renders strategic investment decisions in response 

to threats implausible in two dimensions: 

1. The employee does not present an option 

with a potential profit or return on investment. 

Instead he presents an already anticipated 

solution. The employee will be evaluated 

only on the quality of the proposal. 

This particularly includes ease of implementation. 

Presenting a proposal that is 

conceptually distant from core business is 

risky: partly because there is relatively more 

focus on the proposed solution; partly because 

the ease of implementation of a noncore 

business proposal is relatively lower; 

partly because it involves a status evaluation 

of the employee (and his lack of ability 

to present implementable solutions); and 

finally because a rejected proposal sends 

the employee back to the drawing board. 

2. Investment decisions are more often 

emergent and less often deliberate. Concluding 

in light of the above, this suggests 

that strategic investments as a response to 

threats are generally less likely compared 

to strategic investments in pursuit of opportunities. 

This establishes two filters in assessing the 

likelihood of CDM investments in emission 

constrained corporations: 

Filter 1: The emission restriction is treated as 

a threat, which leads to a top-down decisionmaking 

process. Investment options are not 

sought in the first place, and while the employees 

do not necessarily understand any specific 

90 


limitations on the range of optional solutions, 

they are likely to define a set of delimiting criteria 

based on their understanding of management 

priorities. Employees are unlikely to come up 

with investment proposals at all if other options 

exist. 

Filter 2: If an investment materializes as evident in 

order to address the threat, the employees will at 

first be aware that this is unlikely to be endorsed 

by management. Still having to solve the problem, 

however, their risk averseness will lead them to 

propose solutions that can be implemented as 

easily as possible. This means that they will stay 

away from more controversial proposals and keep 

options within the existing strategic or even 

tactical reach of the corporation with a high 

probability of endorsement by management. 

In most cases, the CDM fails on both filters. 

Investments, whether CDM or not, are out of 

scope in the first place because making an 

investment in itself is a poor solution to a threat. 

And because CDM encompasses several sectors 

and fundamentally covers only countries that 

do not form core business markets for most 

emissions-constrained entities, the core business 

criterion that the employees will most probably 

pursue to ensure ease of implementation is only 

rarely fulfilled. Furthermore, employees will have 

particular difficulties in presenting their case 

in the unlikely event that they should decide to 

pursue the non-core CDM investment option. 

They can hardly justify investing time and 

money in the collection of information. At the 

same time, a strong and well-documented case 

is what they need to convince management. If 

they are not specifically asked to look into the 

CDM investment option, they are unlikely even 

to consider it. This means that CDM investment 

is in conflict with the normal ways in which 

investment proposals emerge in corporations. 

Pursuit of opportunities 

It follows from the above that CDM investments 

have to result from the pursuit of opportunity, 

and apparently by corporations that do not 

regard the emissions constraint as a threat. 

An illustrative case of a pursuit of opportunity 

created by imposing regulation would be the 

development of the Danish wind-turbine industry 

during the 1980s. With politically formulated 

targets for the adoption of renewable energy 

sources in the Danish energy supply system, a 

…the issue is how to address this 

unilateral investment drive and bring CDM 

back to its original idea of promoting 

investment and technology transfer. 

market for renewable energy technology was 

born. Seriously affecting the profitability of the 

energy supply (wind energy at the time being 

appreciably uncompetitive even at increased 

oil prices) the power sector could have been 

expected to pursue the opportunity to start 

developing and constructing wind turbines. It did 

commission two turbines and initiated research 

and development activities primarily related 

to operation, integration and control. These, 

however, seem to have been activities initiated 

solely as responses to the threat constituted by 

the obligation to include larger shares of windbased 

power supply. The special competence 

developed by the Danish utilities for integrating 

high percentages of wind-generated electricity 

into electricity grids has not been exported at 

all to the growing number of countries that are 

presently embarking on significant expansions of 

wind energy. 

The business opportunity inherent in erecting 

wind turbines – namely the production and supply 


91 


of wind turbine technology – was exploited by 

others, not the power corporations. Instead, Vestas, 

which has a history of producing, among other 

things, coolers and cranes (an obvious foundation), 

started production in 1979. Since then it has 

developed into the largest global manufacturer of 

wind turbines, initially supported by conducive 

local market conditions, and gradually expanding 

into other markets where equally favourable 

market conditions had evolved. 

This example indicates that it is not the product 

but the process that defines the core competencies 

of a corporation. The power corporations did not 

solve the problem because their own processes 

do not support the development of new products, 

only the optimization of their own processes. 

This also indicates that opportunities that are 

explored as a response to a threat encompass 

only those options that mitigate the direct effect 

of the threat. Broader market opportunities are 

explored by others. 

For CDM, the opportunity rests first and foremost 

with the local, unilateral project developers. They 

do not fail on the filters because there is no threat 

demanding any particular response. They can 

afford to wait or to do nothing at all. The important 

question, of course, is why they choose to invest. As 

the analysis of the first few hundred CDM projects 

illustrates, developing countries’ own project 

developers and power corporations support 

virtually all CDM projects with their own capital. 

At first sight they should be even more remotely 

interested in emissions reduction compared to 

their Annex-I counterparts. But it turns out that 

their investment appetite in wind energy, biomass 

projects, hydro projects and energy efficiency 

beats their emissions-constrained colleagues 

in Annex-I countries. They are obviously not 

responding to any threat because there isn’t any. 

They are pursuing opportunity. 

On the face of it, there should be nothing wrong 

with that. But for those projects that rely on 

two revenue streams, power and carbon, what is 

questionable is whether these massive unilateral 

investments are driven by CDM and the relatively 

limited revenues from CERs, or whether their 

pursuit of opportunity rests solely with the CDM 

registration of projects they were planning in any 

case. There are obvious alternative reasons, most 

of which relate to domestic policies: for example, 

the Chinese targets for wind- and biomassbased 

power generation, as well as targets for 

energy efficiency in the thousand most highly 

emitting corporations. This relates to the issue of 

additionality, which has been discussed extensively 

for years. While unilateral investments do not 

clearly discard the additionality of projects, they 

do not support it either. It is entirely possible to 

identify unilaterally financed CDM projects that 

are truly additional and which also include the 

purchase of foreign equipment., However, the 

problems the CDM community faces in finding 

sufficient evidence of early CDM consideration 

to ensure project registration – and the recent 

EB response 5 requiring notification to the 

national DNAs of project consideration – 

illustrate concerns that motivations are 

being tampered with. 

The present records in the market also compromise 

the initial intentions regarding technology 

transfer, as the majority of projects undertaken 

by local investors seem to employ local technology, 

thus bolstering the argument that these 

projects are building on traditional investment 

motivations and that CDM registration is regarded 

as an opportunity associated with the usual 

business. 

5 In accordance with the EB41 report Annex 46, the national DNA 

should be informed of any CDM project within six months from the start 

date of the project. The announcement is valid from 2 August 2008. 

http://cdm.unfccc.int/EB/041/eb41_repan46.pdf 

92 


It is left it to readers here to determine how best 

to interpret the additionality consequences of 

the prevailing unilateral financing. The present 

author believes that the additionality test, as 

presently administered by the EB, is not an efficient 

guardian of the environmental integrity 

of the Protocol. More importantly, however, the 

issue is how to address this unilateral investment 

drive and bring CDM back to its original idea of 

promoting investment and technology transfer. 

Other structures may be more suitable in ensuring 

the original aim of promoting technological 

and financial transfers from Annex-I to non-Annex-I 

countries. 

Solutions to the problem 

De-regulate CDM 

There are several ways to approach this issue. The 

idealistic approach would be to attempt to divert 

Annex-I investment capital from its present use 

into CDM activities. It is clear from the above 

that the emissions-constrained entities will be 

the very last to move on such an agenda, standing 

last in the queue of investors that pursue opportunity. 

Clearly, CDM investment so far has not 

been regarded as an opportunity by many Annex- 

I investors. The reason is that CDM can never be 

seen in isolation. Traditional investment drivers 

are paramount, and the addition of the opportunity 

provided by carbon credits is regarded as 

secondary – or, more appropriately, is considered 

an extra risk to the extent that business models 

depend on it. If the fundamental investment 

drivers are not attractive, then even a significant 

prize linked to the carbon credits cannot bring 

investors on board. It cannot turn a bad risk into 

a good risk: the chances of winning do not increase 

with the size of the prize. 

It can also be argued that the more complicated 

and unpredictable the approval mechanisms for 

CDM become, due to a continuous flow of retroactive 

alterations of the rules, the more the CDM 

decision parameters are – and should be – marginalized 

compared to the core investment. And 

if they were not, the market should marginalize 

itself as being too unpredictable and too politically 

motivated. 

Thus, to reintroduce the CDM as an opportunity 

in itself, the rules of the game must be significantly 

de-bureaucratized. Such a move would in 

particular mean abolishing the additionality test 

and common practice analyses. This may not have 

…loosening (or abolishing) the additionality 

criterion implies no risk of flooding the 

market with yet another wave of credits 

from the big developing countries. 

as drastic consequences as might be assumed. 

According to an assessment of the developing 

countries’ ability to generate CERs based on their 

domestic project financing capability, the annual 

generation capacity for energy, waste and HFC 

projects is about 250-300 million CERs annually 

(Lütken and Michaelowa (2008) pp. 119-23). This 

figure can be increased by a number of factors. 

In particular, the inclusion of energy efficiency 

projects will have a positive effect on this figure, 

and other, smaller sectors may add equally to 

generation capacity. In fact, however, this assessment 

indicates that the CER generation capacity 

of developing countries may well be close to exhaustion 

when compared to the September 2008 

UNEP/Risoe assessment of the total generation 

of CERs from presently known projects. Here the 

estimate is about 1500 million CERs up to and 

including 2012 (i.e. approximately 300 million 

CERs annually). So loosening (or abolishing) the 


93 


additionality criterion implies no risk of flooding 

the market with yet another wave of credits from 

the big developing countries. Recent records in 

the Chinese market seem to support this interpretation, 

as the number of projects requiring 

financing is drastically increasing. 

If developing countries are close to their CER 

generation capacity, a total de-bureaucratization 

of CDM will probably not produce a significantly 

increased number of locally financed projects. 

From the investment motivations outlined above, 

…to reintroduce the CDM as an opportunity 

in itself, the rules of the game must be 

significantly de-bureaucratized. 

it should be understood that local project developers 

should be the first to move in pursuit of 

opportunity. And opportunity to them, first of all, 

would represent the registration as CDM projects 

of those activities that were on their books already. 

In any case, domestic investors do not need 

as much incentive as their foreign counterparts, 

as they are already in the market. But eliminating 

risks in the CDM system may attract the foreign 

financing that is presently evading the CDM. 

The result of such a move may be the fostering 

of more projects with a more cutting-edge technology 

content. It would also help overcome the 

backlog of projects that are presently stranded 

in a clogged validation and registration system 

which causes project owners increased losses by 

the day and compliance buyers unnecessary uncertainty 

as to how many credits will they actually 

be able to realize through their Emission Reduction 

Purchase Agreements (ERPAs). The value 

of such a move in terms of smoothening system 

operation could even outgrow the value in terms 

of improved technology transfer through greater 

foreign investment. 

Technology requirements 

But there are other, more top-down ways of 

shifting the balance towards greater financial 

and technological transfers through CDM. The 

problem with all of them is that they will reduce 

the eligibility of locally initiated projects. If, for 

example, indigenous technology is excluded from 

registration, it would logically improve the relative 

share of foreign investments in CDM not because 

of increased foreign investment, but because of 

lower registration of locally financed projects. This 

would also be a logical consequence if a global 

common-practice analysis was introduced. Most 

locally financed projects are common-practice 

or business-as-usual projects and only seldom 

incorporate unfamiliar technology. Requiring 

the employment of transferred technology 

would immediately render a significant number 

of projects ineligible. To the extent that local 

investors respond to such requirements, the CDM 

would respond to its original aim of fostering 

technology transfers. But the immense controversy 

in excluding developing countries’ own technology 

from CDM cannot be overlooked. Why require 

foreign technology if the local technology is 

comparable with or even outperforms the Annex-I 

technology? The answer to that question, of 

course, is that there is no need for technology 

transfer in such cases. If technology transfer 

rather than emissions reductions 6 should be the 

objective and driving force behind CDM, then 

there should be nothing wrong in this distinction 

between technologies, as the CDM in those areas 

is apparently not necessary. 

It is difficult to say to what level a technology 

requirement in the CDM would reduce CER 

supply. It might go as high as 70-80% if we look 

at the number of projects that are presently 

based on local technology. But some of the loss 

6 Because the emissions reduction motivation behind CDM is already weak. 

94 


may be recovered through an increased interest 

by foreign investors in bringing in technology. 

Carbon prices would in all likelihood increase 

significantly with a reduced supply of CERs and 

thus improve the case for a number of high-tech 

technologies that cannot compete against local 

low-cost and lower efficiency technologies, where 

such options exist. 

If this requirement was combined with the 

above proposal for de-bureaucratization of the 

CDM, there could be a significant drive for 

pursuit of opportunity from Annex-I technology 

manufacturers for bringing in their technology 

in non-Annex-I countries. This, of course, would 

depend on the conditions that might be attached 

to the technology transfer, whether this would 

be on a single project basis, or have a more 

programme-like approach that could ensure 

some sort of actual transfer of technological 

competencies to the local setting rather than just 

general technology diffusion. Such conditions, of 

course, could also deter technology providers from 

supplying their technology if the requirements for 

giving up licenses or other rights are too steep. 

Sector-based approaches with 

technology agreements 

A last option would be to accept that unilateral 

investment will remain the prime driver of CDM 

until the limits of unilateral financing capacity 

are reached – which may well be at just about the 

present level. However, if more sectors are opened 

up for reduction activities such as international 

transportation, a larger share of the Gross 

Fixed Capital Formation would be activated for 

emissions-reduction activities and thus increase 

supply options. It could be appropriate to structure 

such new sectors in a more sector-wide approach. 

Sector-benchmarking, however, may be difficult 

in many sectors due to uneven distribution of 

the sector activities. This would be the case for 

some non-Annex-I countries, in particular China, 

labelled as the factory of the world with only a 

few comparable sectors elsewhere. The energy 

production sector, however, may on the face of it 

have better conditions for benchmarking among 

countries, as energy demand is uniform, though 

at different levels and for different purposes 

among countries. A sector approach, or maybe 

a sub-sector approach, would not change the 

financing and technological structures per se, 

but it could promote possibilities for larger scale 

government intervention through bilateral or 

multilateral agreement. Another argument for 

addressing the energy sector is its significance in 

terms of emissions, as well as the immense lockin 

issues that the energy sector represents. A 

decisive technology-transfer strategy could avert 

investments in outdated technology 7 and produce 

significant prevention of GHG emissions. 

Bilateral or multilateral intervention in energy 

sectors could materialize as technologytransfer 

agreements, i.e. supported investment 

programmes. They should depend on privatesector 

choices of technology, as the public sector 

has a bad track record in pinpointing the most 

prospective technologies for development. But 

the intervention should remain a governmentcontrolled 

and government-regulated rollout 

activity, with generation of CERs not for 

the private market but for intergovernmental 

exchanges of credits between the recipient 

and the bilateral or multilateral technology 

transfer partner. In that manner, technological 

agreements and government support could be 

weighed against the value in emission credit 

terms, while not necessarily counting ton by 

ton. Such agreements would be evaluated by the 

Executive Board, or more appropriately by other 

7 The IEA assesses that developing countries will need US$5 trillion of 

investments in energy infrastructure up to 2030, according to the Energy 

Investment Outlook for 2003. 


95 


institutions that are better suited for dealing in 

intergovernmental affairs. The technology and 

financial transfers would be secured through 

international agreement. They would probably 

crowd out individual, stand-alone, private-sector 

CDM initiatives in the sector, though local 

private financing would still be involved in the 

activities included in such government-driven 

programmes. The private sector would still be 

responsible for the base financing corresponding 

to the business-as-usual scenario. 

In some sense, this might correspond to the Global 

Environmental Facility’s (GEFs) ‘incremental cost’ 

approach, but the scope, level of financing and 

above all the break from single-project approaches 

distinguishes this idea from the GEF. For all means 

and purposes, it addresses both technology transfers 

and the present unilateral financing imbalance. It 

has the potential to produce significant amounts 

of additional emissions reduction that can benefit 

Annex-I national emissions accounts, which may 

or may not come out as more generous national 

allocation plans. In any case, the Annex-I private 

sector will be left with a smaller share of non-Annex-I 

Gross Fixed Capital Formation for the generation 

of CERs due to the reservation of a large share of 

it for government-to-government initiatives. This 

could promote a demand-driven shift towards more 

sustainability-focused projects, depending on how 

the bilateral agreements on the technology transfer 

for emissions reduction are translated into national 

allocation plans. 

Conclusion 

The options outlined above may not be particularly 

sophisticated, but they address the 

unilateral financing problem in different ways: 

1) a bottom-up approach to increase bilateral 

projects, including de-regulation of CDM; 2) a 

reduction in the eligibility of unilateral projects’ 

through technology requirements; or 3) a topdown 

approach to force efficiency gains in a 

sector which is most relevant for the energy 

sector. Option one may marginally increase the 

supply of CERs. Options two and three would 

decisively reduce it. 

If the opportunity-driven unilateral financing of 

projects indicates a less convincing additionality 

argument, such a reduction would improve the 

environmental integrity of the mechanism. 

That would correspond to a devaluation of the 

CERs from CDM projects. Devaluating CERs 

by allowing e.g. only 70% crediting of CERs 

corresponding to a 30% compulsory retirement 

would, however, not bring in additional benefits 

in terms of technology transfer. Such devaluation 

might not help increase prices on carbon either. 

In fact, it might do just the opposite, as the 

crediting value of CERs would be devaluated 

so that it would take more CERs to produce 

the same level of compliance. If it is true that 

developing countries produce CERs close to the 

limit of their investment capacity, an increase in 

CER supply may be less likely, but the price effect 

may still be the same, i.e. negative. Compared to 

this scenario, some of the technology approaches 

may fare better. 

But how would the different approaches address 

the investment motivation among project promoters? 

The de-regulation will work as an encouragement 

for all market agents to pursue 

a mechanism that, through such a move, will 

increase its image as an opportunity. Obviously, 

abolishing the additionality test would immediately 

lead to accusations of a further 

reduction in the environmental integrity of 

the mechanism and the Protocol. The paradox 

is that, by creating such increased motivation 

for pursuit of opportunity, particularly for 

foreign investors, new projects may materialize, 

96 


Table 2. Different approaches to altering the CDM and their effects on CERs and investment flows 

model 

effect 

Technology transfer Sustainability CER supply 

Effect on relative bilateral 

investment 

De-regulate CDM Minor increase No effect Minor increase Minor improvement due to 

increased FDI 

Technology 

requirements Significant increase No effect Significant decrease 

Significant positive effect 

due to ineligibility of many 

common practice projects 

Sector-based 

approaches 

Significant increase 

No effect – 

possibly small 

positive derived 

effect 

Significant decrease, 

but significant 

increase in emissions 

reduction through 

government trades 

Significant positive effect 

due to requirements 

of bilaterally financed 

technology transfer 

i.e. projects that did not happen before and 

therefore can be said to be additional. Once 

non-Annex-I investors have exhausted their 

CER generation capacity in investment terms, 

the risk of registering more business–as-usual 

projects is insignificant. Hence, paradoxically, 

eliminating the additionality test could lead to 

more additional projects! 

If technology requirements are introduced, it 

will shift the picture significantly. Non-Annex-I 

investors can no longer restrict the pursuit of 

opportunity to the registration of a project activity 

that would have been undertaken in any case. 

Now, the requirements will also enforce a change 

of technology, which may be regarded as a risk 

to the original venture. Assuming that corporate 

investment decisions are equally emergent in a 

developing country setting, it raises the stakes 

for employees to propose non-conventional 

investment ideas. If corporate investment 

decisions are less emergent and more deliberate 

in such settings, the employees’ responses 

to management information requirements 

will resemble a threat, which eliminates nonconventional 

proposals like adopting expensive 

and unfamiliar technology. It will, however, also 

foster a new situation for technology suppliers in 

Annex-I countries in seeing improved conditions 

for placing their technology in non-Annex-I 

markets. A stronger drive would lead to more 

opportunity-driven ventures. Also, Annex-I 

developers may follow the trend in pursuit of 

opportunity based on what to them is familiar 

but high-end technology. 

Finally, in the sector-based approach the picture is 

more diverse. The opportunities here are defined 


97 


as top-down, though the technology choices will 

still be based on private sector input. The pursuit 

of opportunity is at first within the Annex-I 

corporations, i.e. the technology providers, not the 

emissions-constrained entities, but the pursuit 

is with technology ‘placement’, i.e. prioritization. 

The roll-out of the technology transfer is the real 

prize for the technology provider. Depending on 

the design of the model, the technology transfer 

provisions may equally be seen as an opportunity 

by the recipient. But the recipient need not 

be the project owner: it may be a technology 

recipient identified through more or less public 

intervention, or even be a public sector entity 

like a university or a research institution. Hence 

the structures of motivation become much 

more complex, though the overriding driver of 

motivation is top-down international agreement 

and non-Annex-I domestic regulation. 

outside existing scopes and strategies. Therefore, 

future regulation should more precisely address 

those entities, Annex-I and/or non-Annex-i, that 

see emissions reduction as an opportunity. 

Søren Lütken is the General Director of Caspervandertak Consulting 

Beijing, specializing in CDM and climate change consulting. He 

previously worked for the Danish Ministry of Foreign Affairs’ 

Trade and was a Development Counsellor in renewable energy, 

climate change and the CDM at the Danish Embassy in Beijing. 

Contact: lytken@webspeed.dk 

The main message is that overcoming the 

predominant unilateral investment characteristics 

of the CDM requires initiatives that improve the 

motivation for pursuit of opportunity among the 

Annex-I technology providers and developers. As 

it is not realistic to improve the overall investment 

climate in non-Annex-I countries, initiatives must 

focus on regulation within the climate regime to 

change investment drivers. Such new regulation 

must represent options for pursuit of opportunity 

in a form that is recognized and accepted by 

the industry and other market agents, who are 

supposed to increase their attention towards 

a CDM with more obvious promotional and 

regulatory characteristics for the transfer of 

technology. 

It should be recognized above all, however, that 

the regulated entities in Annex-I countries are 

not the target for the CDM, as they will only react 

to the threat of regulation, and a threat does 

not entail responses in the form of investments 

98 


References 

FCCC/CP/1998/MISC.7 at http://unfccc.int/resource/docs/cop4/ 

misc07.htm) 

http://cdm.unfccc.int/EB/041/eb41_repan46.pdf 

Public-Private Infrastructure Advisory Facility (PPIAF), World Bank. The 

Private 

Participation in Infrastructure Database (Accessed November 2007). 

http://ppi.worldbank.org/explore/ppi_exploreRegion.aspx?regionID.1. 

Butler, Richard et al. (1993): Strategic investment decisions, Routledge 

ISBN 0-415-07507-6Hb. 

Lütken and Michaelowa (2008): Corporate Strategies and the Clean 

Development Mechanism: developing country financing for developed 

country commitments. Edward Elgar 2008. 

IEA (2003): World Energy Investment Outlook 2003, Chapter 7. International 

Energy Agency. 


99 


100 


DUAN Maosheng 

Tsinghua University, China 

The Clean Development Mechanism: 

Assessment of Experience and 

Expectations for the Future 

Abstract: 

With the aim of promoting further the CDM’s 

objectives, now is the time to look back and 

review the performance of the international rules 

and to consider possible improvements to the 

mechanism for the period after 2012. To this end, 

the paper provides an overview of the requirements 

for CDM projects by the Kyoto Protocol and 

the Marrakesh Accords. It then assesses the 

performance of CDM projects based on current 

practice regarding six aspects: emission reductions, 

sustainable development, environmental impact, 

technology transfer, geographical distribution 

and transparency, efficiency, and the effectiveness 

of the system in operation. Expectations for the 

post-2012 CDM regime are proposed. Finally, 

proposals on the scaling-up of the CDM are 

discussed and some initial thoughts considered. 

Seven years have passed since Marrakesh, where 

the basic framework of the international CDM 

regime was established and the first commitment 

period begun. After the registration of the firstever 

CDM project on 18 November 2004, the 

market has witnessed both a rapid boom in CDM 

project registration in 2006 and flat or even 

stagnant development since 2007. To date, more 

than 1100 projects have already been registered 

with expected annual emission reductions of 

more than 220 million tCO2e, and a review has 

been requested for about 400 projects, a rather 

significant share. All major procedures within 

the CDM regime have been well tested and 

significant experience gained. 

At its first session, the COP/MOP initiated a 

process to consider further commitments for 

Annex I Parties for the period beyond 2012 in 

the form of an open-ended adhoc working group. 

101 


Acknowledging the great contribution of the 

CDM in mitigating emissions and promoting 

sustainable development in developing countries, 

and bearing in mind also various criticisms of the 

mechanism, at its fifth session the working group 

agreed that emissions trading and the projectbased 

mechanisms under the Kyoto Protocol 

should continue to be available to Annex I Parties 

as means to meet their emission reduction targets 

and could be appropriately improved. 

Now is the time for the international community 

to look back and review the performance of the 

international rules in promoting the CDM’s 

goals and consider possible improvements to the 

mechanism for the period after 2012. 

To this end, the paper first provides an overview 

of the requirements for CDM projects. It then 

assesses the performance of the CDM projects 

in the context of these requirements, including 

both achievements and challenges, based on upto-date 

international practice. Expectations for 

the new CDM regime after 2012 are proposed. 

Finally, proposals on the scaling-up of the 

CDM are discussed and some initial thoughts 

considered. 

Requirements for CDM Projects 

Under the Kyoto Protocol, the CDM was 

established for two purposes: to assist non-Annex 

I Parties in achieving sustainable development, 

as well as contributing to GHG mitigation, and 

to assist Annex I Parties in achieving compliance 

with their quantified emission limitation and 

reduction commitments. It is also required 

that each CDM project should result in real, 

measurable and long-term emission reductions, 

additional to any that would occur in the absence 

of the project. 

• Under the Marrakesh Accords, some of these 

requirements were elaborated further: 

• a CDM project is additional if GHG emissions 

are reduced below those that would have 

occurred in the absence of the project; 

• it is the host Party’s prerogative to confirm 

whether a CDM project assists in achieving 

sustainable development; 

• project participants need to assess the 

environmental impact of the underlying 

project and, if those impacts are significant, 

an environmental impact assessment should 

be conducted in accordance with procedures, 

as required by the host Party; 

• CDM projects should lead to the transfer of 

environmentally safe and sound technology 

and know-how; 

• there is a need to promote equitable geographical 

distribution of clean development 

mechanism project activities at the regional 

and sub-regional levels. 

Furthermore, for the CDM to make a significant 

contribution in these respects, the whole CDM 

system should operate in a transparent, equitable, 

efficient and effective manner. 

The performance of the international CDM 

regime is assessed, therefore, in accordance with 

the following aspects: 

1) Expected additional emission reductions; 

2) Contribution to the sustainable development 

in the host country; 

3) Environmental impact; 

4) Contribution to technology transfer; 

5) Equitable geographical distribution; 

6) Transparent, equitable, efficient and effective 

operation of the CDM system. 

Assessments of the Current CDM Regime 

1) Expected additional emission reductions 

Up to now, the expected annual emission 

reductions of more than 1100 CDM projects 

102 


that have already been registered have exceeded 

220 million CO2e, a little more than the annual 

emissions of the Netherlands. Projects currently 

in the pipeline have almost the same emission 

reduction potential. It could be seen that CDM 

has been a great success in terms of promoting 

the mitigation efforts in developing countries 

and in reducing the cost to developed countries 

of complying with their emission reduction 

targets under the Protocol. 

There is, however, also much criticism about the 

additionality of some types of registered projects. 

Since the final decisions on the registration of 

CDM projects and issuance of CERs are made by 

the EB (and not by a technical committee such as 

the Registration and Issuance Team), questions 

have been raised as to whether EB members, 

who are usually from government agencies, 

have the necessary expertise to make the right 

decisions. There are even suspicions that key 

decisions are being made on a political basis. 

The current additionality assessment requires 

that the specific situations of each proposed 

project should be verified and assessed, while 

the baseline scenario identification requires 

the determination of a hypothetical scenario. 

Both of these are processes involving subjective 

judgment and are by no means easy, although 

relevant evidence and the underlying logic 

involved should be presented and validated. EB 

members may be inclined to make a judgment 

based on their impressions of and preferences for 

the particular technologies a project proposes to 

use, rather than on the evidence. 

Furthermore, since requests for a review have 

been made for an increasing proportion of the 

projects proposed, the uncertainties regarding 

registration and issuance have grown from the 

project proponents’ viewpoint. As a result, it 

is not easy for investors to take the incentives 

deriving from CDM into serious consideration 

when making their investment decisions. Some 

of them may prefer to make decisions without 

considering the CDM factor at all, while try to 

reap possible windfalls afterwards. The respective 

decisions of the EB and of investors will inevitably 

affect each other negatively, and both parties 

may find themselves confronted with a dilemma. 

…more and more investors, especially those in the 

renewable energy sector, are starting to take the 

CDM factor seriously when making their decisions. 

2) Contribution to sustainable 

development in the host country 

In terms of numbers, more than half of the 

already registered CDM projects fall into the 

energy sector, with renewable energy projects 

accounting for the majority; about 20% are for 

waste handling and disposal sector, while more 

than 10% deal with fugitive emissions from fuels 

and manufacturing industries. It is clear that 

most of the projects belong to sectors that have 

significant direct benefits in terms of sustainable 

development. In reality, more and more investors, 

especially those in the renewable energy sector, 

are starting to take the CDM factor seriously 

when making their decisions, and CDM is 

thus playing an effective role in promoting the 

development of relevant industries and thus 

low carbon and sustainable development in the 


Some types of project, especially those dealing 

with GHGs from the chemical industries, have 

been heavily criticized by some because of the 

alleged lack of any contribution to sustainable 

development in the host country. Discussions 

Assessment of Experience and Expectations for the Future 

103 


at the EB and the COP/MOP on relevant 

methodologies have also been at a stalemate 

for quite a long time. The difficulties of such 

discussions are still greater due to the potentially 

significant mitigation potential of relevant 

projects and their potential impact on the 

regional distribution of CDM projects. However, 

it is quite clear from the Marrakesh Accords 

that it is the host country government, not 

any other organization, who should determine 

whether or not a CDM project assists the host 

country in achieving sustainable development. 

Furthermore, there is no agreed definition of 

sustainable development. A mechanism could also 

be established to strengthen the contribution 

of such types of project to the sustainable 

development in the host country. For example, 

China has already established the China CDM 

Fund, most of the income of which comes from 

the share of revenues from sales of CERs by CDM 

projects dealing with end-of-pipe gases. The fund 

is being used to support activities dealing with 

climate change in the country. It can be seen 

that these types of project might also contribute 

significantly to sustainable development in the 

host country. Another important issue to be 

considered is that these types of project do not 

face the additionality challenge that many other 

types face and thus should not be excluded from 

the CDM. 

3) Environmental impact 

For countries without environmental impact 

assessment rules in place, the environmental 

impact assessment requirement will undoubtedly 

provide an incentive for the assessment. For 

countries with such rules in place, the requirement 

could promote the more effective implementation 

of these rules. In some of these countries, 

although the laws or regulations require relevant 

projects to undertake environmental impact 

assessments, these laws and regulations are 

poorly implemented in some sectors and regions, 

and many projects have started construction or 

even operation without such assessment being 

carried out or appropriate approval having been 

granted by the relevant authorities. To comply 

with the CDM requirement, project developers 

have to follow the host country requirements on 

environmental impact assessment. 

4) Contribution to technology transfer 

Technology transfer is not a mandatory 

requirement for CDM projects. According to 

a paper prepared for the UNFCCC secretariat 

in 2007, roughly 39% of all CDM projects (both 

registered and proposed), accounting for 64% of 

the annual emission reductions, claim to involve 

technology transfer, which usually involves both 

knowledge and equipment. This is a quite high 

ratio, indicating that CDM has clearly promoted the 

transfer of technology to developing countries. 

It should be noted, however, that equipment 

imports account for most of the claimed transfers. 

Imports of equipment do not necessarily bring 

technology or know-how to the host countries, 

and most of them occur on a normal commercial 

basis. Without CDM, equipment imports and 

any associated transfers of know-how would also 

happen. The contribution of CDM to technology 

transfer, therefore, should be assessed on the 

basis of additionality, just like the emission 

reductions. Under this assumption, CDM has 

only promoted technology transfer in a very 

limited number of projects or types of project, for 

most of which the major purpose is to mitigate 

GHG emissions, for example, projects using lowconcentration 

methane-oxidization technology. 

5) Equitable geographic distribution 

Currently, more than 60% of registered CDM 

projects are hosted by countries in Asia and the 

Pacific, more than 30% in Latin America and 

104 


the Caribbean, and less than 5% in Africa and 

other regions. Although some efforts, including 

south-south assistance, have already been made 

to promote the regional balance of CDM project 

distribution, much more still needs to be done. 

CDM is a market mechanism, and the private 

sector considers market potential and cost rather 

than regional balance when seeking potential 

projects. So developed country governments 

should shoulder the major responsibility for 

promoting CDM projects in regions that are 

currently taking less advantage of the mechanism. 

It should be noted, however, that regional 

balance means promoting project development 

in regions such as Africa without limiting it in 

other regions. 

6) Transparent, equitable, efficient and 

effective operation of the CDM system 

Operation of the current CDM system, especially 

the performance of the DOE, the secretariat, the 

Meth Panel, the EB, etc., is currently faced with a 

great deal of criticism. 

Up to now, fewer than twenty organizations have 

obtained designation by the COP/MOP as DOEs. 

Given that about 2000 projects are still in the 

pipeline and more than 1100 projects have entered 

the stage of verification and certification, all the 

DOEs have actually been overburdened with the 

validation and certification work for quite a long 

time. This causes delays and sometimes a poor 

quality of work, and thus the loss of CERs for some 

projects with operation time before registration. 

For those DOEs with offices and local staff in the 

major developing countries, such delays to work 

are very serious. It often happens that projects 

cannot be submitted for registration before the 

deadline for old versions of methodologies, and 

thus the project proponents have to change the 

methodologies or versions of methodologies and 

go through the whole validation process again. 

The technical capacity of the DOEs is also causing 

concern for many. Although the accreditation 

procedure for a DOE is very strict and lengthy, 

many validators of DOEs, especially those in 

local offices in the host country, actually do 

not have adequate capacity for their work. The 

situation became even worse because of rapid 

turnover of experienced validators. Dealing with 

inexperienced validators is a genuine nightmare 

for project proponents. The absence of suitable 

internal training within the DOE is part of the 

problem. 

Imports of equipment do not necessarily bring 

technology or know-how to the host countries, and 

most of them occur on a normal commercial basis. 

Internal procedures of the DOE related to 

validation, verification and certification also 

need to be clearly laid down and presented 

transparently to project developers. In many 

cases, project proponents may find themselves 

lost in the DOE’s internal procedures, without 

knowing where their project has got to and 

who they should contact in case of need. 

Coordination between the DOE’s headquarters 

and its local offices should also be strengthened. 

In many cases, the headquarters and the local 

offices could both sign a contract with project 

owners in the same country, but project owners 

may find later on that their projects are being 

treated differently in the local offices and the 

headquarters. 

By its very nature, the DOE should behave 

neutrally and adhere to the rules laid down by the 

COP/MOP and the EB. It should neither establish 

new rules for the CDM itself nor come up with new 

ideas or create new requirements (for example, 


105 


key custom, or promise of project numbers) that 

may affect their neutral operation. 

The secretariat is mainly being criticized for its 

low level of efficiency. It very often happens that 

projects must wait about two months just for 

completeness checks by the secretariat in the 

case of request for registration. This may mean a 

significant CER and income loss for the project 

proponents. 

In order to calculate precisely the emission 

reductions that have been achieved by a specific 

CDM project, the Meth Panel and the EB have 

developed very complicated methodologies and 

tools. However, some of the requirements of many 

approved methodologies are either not very clear 

or not appropriate, and thus have created barriers 

to these methodologies being utilized. In the 

case of energy efficiency-related methodologies, 

for example, by 24 September 2008, no project 

had been published on the UNFCCC website for 

global stakeholder consultation as part of the 

validation process for more than ten approved 

methodologies, a very significant proportion. 

This reflects clearly the difficulty of using some 

approved methodologies and the need for approval 

of the current methodology approval procedure. 

Furthermore, complicated methodological require 

ments also mean that project proponents 

should have strong technical capacity, which 

may impede the development of CDM projects in 

certain areas. 

With regard to the EB, besides other issues, the 

registration process is being criticized severely 

for its unpredictability and inconsistency. Some 

projects receive registration automatically, while 

other similar projects are reviewed for general 

issues which are equally relevant to the former. 

A more serious concern is that, in some cases, 

certain issues have already been discussed and 

settled by the EB during the process of project 

review, while requests for review are raised again 

for the same reasons. 

Another challenge facing the current CDM market 

is the uncertainties regarding market demand 

and price, especially whether or not the CDM will 

continue to exist after 2012. These uncertainties 

have already affected the continuation of efforts 

to develop CDM projects. 

Expectations for the Future 

A future CDM regime should address effectively 

the current challenges the mechanism is facing. 

First, the mechanism should be more efficient, 

equitable, transparent and simplified, should 

provide greater certainty to project investors, and 

should contribute more to technology transfer. 

The efficiency of the whole system, including 

each major procedure, should be improved. 

Similar projects should be treated similarly, and 

balanced regional distributions of CDM projects 

should be promoted. Rules should be more 

transparent and clearer, leaving less room for 

subjective judgment by relevant actors, and thus 

providing enough certainty to investors for them 

to consider CDM more seriously. Environmental 

integrity should in no case be sacrificed: on the 

contrary, it should be strengthened. 

Second, to create certainty for market demand 

and price, developed countries should not only 

commit themselves to deeper mitigation targets, 

but also formulate and implement clear policies 

on the utilization of CERs. 

Third, CDM methodologies should be simplified 

significantly for the purpose of easy application, 

not focusing too much on precision, but 

providing better opportunities for conservative 

106 


choices to be chosen by project participants. 

The project proponents should at least be given 

the flexibility to choose between complicated 

precision and conservative simplification. 

Fourth, it may be worth considering the possibility 

of modifying current institutional arrangements, 

for example, through a reallocation 

of responsibilities among different participants 

in the system. Given the workload and work 

quality of the DOEs, accreditation procedures 

should be simplified to increase the number 

of DOEs, while periodical assessment should 

also be carried out in order to make sure that 

DOEs have the necessary technical capacity and 

appropriate internal quality-control procedures. 

Another possibility is to establish more restricted 

but clearer responsibilities for DOEs and remove 

some of their current responsibilities to other 

organizations. For example, the role of host 

country governments could be strengthened 

on certain issues, including clarification of 

the mandatory legal requirements for certain 

types of project, dissemination rates for certain 

technologies, environmental impact assessment 

and stakeholder consultation requirements, etc. 

in the host country. 

Fifth, the EB should strengthen its executive 

role on the mechanism, mainly, for example, 

by providing the necessary and clear guidance 

to Parties, DOEs and project participants, as 

well as a systematic review of the issues that 

commonly arise in the project cycle, together 

with the necessary clarification and guidance. 

It should avoid becoming intensively involved 

in the discussion of specific projects, which 

should mainly be left to the relevant technical 

committees. To facilitate the work of the EB, 

its members should also possess the necessary 

expertise. 

Sixth, the role of external experts, especially 

industry experts, should be strengthened with a 

view to improving considerations of reality and 

reflecting it better. 

Seventh, a stronger, more professional, efficient 

and neutral secretariat should be established, its 

main focus being to support the EB. 

….some of the requirements of many approved 

methodologies are either not very clear or not 

appropriate, and thus have created barriers 

to these methodologies being utilized. 

Eighth, the additionality test could be removed 

for certain identified technologies, for example, 

wind power. This will provide the certainty that 

project investors require to make investment 

decisions and thus continuously promote the 

development of the relevant sectors. At the same 

time, environmental integrity could be achieved 

on a macro level through conservative baseline 

setting. 

The key aim of all future improvements should 

be to provide the necessary climate to promote 

the use of low carbon technologies through 

the mechanism, on the condition of assured 

environmental integrity. 

Scaling-up the CDM 

Scaling-up the CDM is now one of the focuses 

of discussion about the future CDM regime. It is 

advocated for various reasons, including ensuring 

the greater involvement of developing countries, 

addressing international competitiveness concerns 

and increasing the supply of low-cost 


107 


mitigation credits. The CDM was established 

for two reasons, namely to promote sustainable 

development in the host developing countries, 

and to assist developed countries to achieve 

their mitigation targets under the Kyoto 

…to create certainty for market demand 

and price, developed countries should not 

only commit themselves to deeper mitigation 

targets, but also formulate and implement 

clear policies on the utilization of CERs. 

Protocol. It should not be expected to shoulder 

responsibilities other than these two, such 

as promoting the greater involvement of 

developing countries or addressing international 

competitiveness concerns. Other issues should 

be considered as part of other right forums than 

the CDM. 

There are many proposals for the scaling-up of 

the CDM, many with different names, but they 

can basically be divided into four categories: 

absolute target-based crediting mechanism, 

intensity-based crediting mechanism, policy 

and measure-based crediting mechanism, and 

technology-based crediting mechanism. For all 

of them, the underlying logics are the same, i.e. 

first establish a baseline, and then compare the 

baseline with the actual performance of relevant 

sectors to determine whether or not emission 

reductions could be generated, and if so, the 

amount of emission reductions. Furthermore, in 

all cases the baseline and follow-up assessment 

approaches should be reviewed and approved 

through relevant international procedures; if 

the pre-established target is not achieved, no 

penalty will apply. The major difference between 

these approaches is the format of the baseline, 

i.e. absolute targets, intensity targets, policy 

and measures implementation or technology 

implementation. 

For an absolute target-based crediting mechanism, 

the political readiness of developing countries to 

accept it is the major challenge. Furthermore, the 

establishment of a reliable baseline depends on 

a precise projection of future emissions, that is, 

the product of the output and emissions intensity 

per unit product, of the associated sectors. 

Such projections, however, have been proved 

by history to be very difficult if not impossible 

tasks, especially for rapidly developing countries. 

This being the case, one possible solution is to 

establish a loose target that may be accepted 

by the host country, but the question is how to 

ensure that real additional emission reductions 

can be achieved. 

An intensity-based crediting mechanism is more 

acceptable to developing countries from the 

political point of view compared with the absolutetarget 

based approach. The technical difficulties, 

however, remain the same. For sectors with lots of 

heterogeneous products, it may be necessary to 

establish different baselines for different project 

types, which could be very time-consuming. 

Data availability is another key challenge for 

this approach. For most developing countries, 

publicly available and reliable information that 

is necessary for the establishment of the baseline 

is always a serious challenge. This is even true for 

most large developing countries, which people 

think should have more complete statistical 

systems and stronger technical capacity. To 

ensure that credits will be issued for additional 

emission reductions remains another great 

challenge. 

108 


A policy and measure-based crediting mechanism 

seems to be acceptable to developing countries 

politically. The major challenge is how to assess 

the emission reduction benefits of a specific 

policy or measure: emission reductions are the 

result of many integrated factors, and it is very 

difficult to separate out the effects and attribute 

them to different factors. 

transfer of technology to developing countries 

from developed countries more effectively. For 

example, one possibility is that the emission 

reductions associated with the application of 

eligible technologies transferred from developed 

countries will be allocated to the latter, while the 

receiving developing countries could benefit from 

the associated local sustainable development. 

There are different understandings of a 

technology-based crediting mechanism. One 

is that projects utilizing certain technologies 

are automatically considered eligible under 

the CDM and thus could generate emission 

reduction credits, i.e. the additionality test is 

waived for such projects. The risks of free-riding 

and exaggeration of emission baselines and thus 

emission reductions could be eliminated through 

the careful selection of eligible technologies, 

the careful determination of relevant emission 

baselines, and the strong participation of host 

country governments and relevant national and 

international industry associations. Furthermore, 

before developing a project, the project 

developers could know in advance the eligibility 

of their projects under this mechanism and 

the rough amount of emission reductions their 

projects should achieve, which could encourage 

the realization of emission reduction potentials 

in relevant industries. Compared with the 

current CDM, more data are needed. However, 

through the participation of the host country 

governments and the industry associations, this 

may not be a huge challenge. Alternatively, only 

technologies for which relevant information is 

available will be included in the eligible list. For 

project developers, the data requirement will be 

greatly reduced and will mainly concern general 

project-specific technical information. Such data 

could be rather easily accessed and verified by 

the validators. Such an approach, given its direct 

association with technologies, could promote the 

Conclusions 

The CDM is serving its dual purposes well 

while also facing many challenges, including 

increasing uncertainties regarding registration, 

its limited contribution to technology transfer, 

the uneven regional distribution of projects, and 

necessary improvements to the transparency, 

efficiency and effectiveness of the system in 

operation. The post-2012 CDM regime should 

try to address these challenges above all else. 

The CDM should adhere to the purposes for 

which it was established, i.e. assisting developing 

countries in achieving sustainable development, 

and assisting the developed countries in 

achieving their mitigation targets under the 

Kyoto Protocol. Any future improvements to the 

rules should be directed to achieving these goals 

better. The mechanism should not be expected 

to shoulder other responsibilities not laid down 

by the Protocol. 

Duan Maosheng is a senior researcher with the Global Climate 

Change Institute of Tsinghua University. Since 2000, he has 

been involved in various aspects of the CDM from international 

negotiations to methodology and project development. 

Contact: duanmsh@mail.tsinghua.edu.cn 


109 


110 


Sergio Sanchez, 

Clean Air Institute 

Reforming CDM and Scaling-Up 

Finance for Sustainable 

Urban Transport 

Abstract 

Improvement of urban transport systems in 

developing countries has an enormous potential 

to mitigate greenhouse gases while addressing 

other urgent environmental, social and economic 

issues. However, the transport sector is not 

well represented in the Clean Development 

Mechanism (CDM) portfolio. There appears to be 

opportunities to improve the CDM by broadening 

its scope and simplifying its rules. Furthermore, 

there is an urgent need to develop improved policy 

instruments to enable expanded international 

cooperation. A strategy to reform the CDM and 

scaling up carbon finance to foster sustainable 

urban transport is outlined in this paper. 

Transport and climate change 

The Kyoto Protocol entered into force in 2005. 

A year earlier, global anthropogenic emissions 

amounted to 49 GTCO2-eq. These emissions 

were 25% higher than in the early nineties, when 

the United Nations Framework Convention on 

Climate Change (UNFCCC) was adopted. Global 

greenhouse gas (GHG) emissions could triple in 

2050 compared to the levels reached in 2004 

if no additional climate change policies are 

implemented (IPCC, 2007). 

The transport sector is one of the largest and 

fastest growing GHG sources. Between 1970 and 

2004, global GHG emissions from the transport 

sector increased by 120% globally, reaching 

6.4 GTCO2-eq (13.4% of the total). While 

industrialized countries still hold the largest 

share of GHG emissions from the transport sector, 

111 


With the current climate change 

mitigation policies and related 

sustainable development practices, 

global GHG emissions will continue to 

grow over the next few decades.… Two 

thirds to three quarters of this increase 

in CO2 emissions is projected to come 

from non-Annex 1 countries.…” 

Intergovernmental Panel 

of Climate Change 

Intergovernmental Panel of Climate Change 

emissions from developing countries are growing 

rapidly. Between 1990 and 2002, transportrelated 

CO2 emissions doubled in China, 

Indonesia and South Korea. Looking ahead, 

the International Energy Agency (IEA) expects 

soaring increases in China (143%), Indonesia 

(122%), India (91%) and Mexico (71%) by 2020 

compared with current levels (IEA 2006). 

In addition, transport is the major source of 

urban air pollution. Air pollution in cities 

throughout developing countries affects the 

health and well-being of billions of people as 

well as the environment. Poor air quality results 

in hundreds of thousands of premature deaths 

and billions of dollars in medical costs and lost 

productivity each year (CAI 2007). 

Scientific knowledge, as well as current and 

projected levels of air pollution and emissions 

rates of greenhouse gases in urban areas of 

developing countries, confirms that there is a 

critical need for integrated, forward-looking, 

comprehensive measures to improve air quality 

and minimize the risks associated with climate 

change at the local, national, regional, and 

international levels (GAP 2008, CAI 2007). 

As the impacts of air pollution and climate 

change on public health and the environment 

are better understood, the need to adopt 

strategies that recognize the importance of 

effectively integrating climate change and airquality 

considerations into social and economic 

development planning becomes more apparent. 

Burning fossil fuels is the most common source of 

both greenhouse gas and air pollution emissions. 

Furthermore, air pollutants like black carbon and 

tropospheric ozone, which are largely associated 

with transport emissions, are greenhouse gas 

substances too (GAP 2008). Win-win integrated 

strategies to address both issues are needed 

to succeed in fostering sustainable transport 

interventions at the local level. 

Sustainable transport interventions are needed 

to enhance accessibility rather than just mobility. 

Enhanced accessibility is essential to continued 

economic progress. The transportation system 

and its context need to be addressed as a whole 

to develop effective solutions. Transportation 

services enable economic development by 

facilitating the mobility of people and goods. 

Economic growth, which is reflected in increased 

industrial activities and income consumption, 

creates transport impacts. Transport can produce 

negative economic, social and environmental 

impacts, as well as positive externalities. Left 

unrestrained, these impacts and its causes can 

inhibit transport services, thus compromising 

sustainable development (Molina et al., 2002, 

WBCSD 2007). 

112 


For the vast majority of urban areas in developing 

countries, public transport continues to be the 

largest mode of transportation. A combination of 

economic growth, high motorization rates, poor 

quality public transport systems, exacerbated 

metropolitan sprawls and replication of 

unsustainable life-styles is rapidly changing this 

panorama. An accelerated expansion in both the 

number and use of low-capacity modes (such 

as private cars or motorcycles) and a drastic 

diminution of the ability of public transport 

systems to satisfy overwhelming mobility demands 

are generally observed in cities in developing 

countries. 

There are important barriers that need to be 

overcome if we are to succeed in moving on to 

more sustainable transport patterns. Nations 

and cities need support to overcome substantial 

barriers. Support is needed to develop visions 

and policy frameworks, develop more integrated 

programs, strengthen and integrate transport 

agencies and land-use planning agencies, 

and overcome institutional fragmentation by 

improving mechanisms between transport, 

environment and urban planning. 

There is also a need to develop the capacities 

of transport operators, as well as to improve 

business conditions to implement sustainable 

transport practices. More complete regulatory 

frameworks and their enforcement can create 

incentives for private sector investments. Cleaner 

technologies and alternative fuels require good 

business models, regulations and incentives. 

More appropriate priority settings could lead 

to improved finance to support sustainable 

transport interventions. 

Improved and scaled up finance instruments are 

needed to mitigate GHG and achieve multiple 

co-benefits by fostering sustainable transport in 

developing countries. There is a growing consensus 

that the Clean Development Mechanism (CDM) 

in its current form has not sufficiently effective so 

far for achieving this purpose. It has been found 

that it is possible to introduce innovations under 

the current framework to improve the CDM as it 

applies for transport. Nevertheless, there is a need 

to develop improved financial and other policy 

instruments if the forthcoming global agreements 

on climate change are to be effective to addressing 

the urgent transport sector challenges. 

Now is the time for the international community 

to look back and review the performance and 

experiences in applying the CDM to the transport 

sector and consider decisions to be made to 

either improve the mechanism and/or develop 

alternative instruments for the new climate 

change regime after 2012. 

To this end, the paper first provides an overview 

of an ongoing participatory process to develop 

a strategy to improve CDM and to scale-up 

international finance instruments to foster 

sustainable urban transport. It then assesses 

the performance of CDM transport projects and 

The transport sector is one of the largest and 

fastest growing GHG sources. Between 1970 

and 2004, global GHG emissions from the 

transport sector increased by 120% globally, 

reaching 6.4 GTCO2-eq (13.4% of the total). 

identifies key issues limiting its development, 

including both achievements and challenges. 

It also identifies opportunities for CDM to be 

improved under the current framework, as well as 

expectations for the new climate change regime 

Finance for Sustainable Urban Transport 

113 


after 2012. Finally, proposals on the scaling-up of 

the CDM are discussed and some initial thoughts 

considered. 

Building a strategy to improve CDM 

and to scale-up finance to foster 

Sustainable Urban Transport 

For the first time, an international multistakeholder 

effort is underway to build a 

consensus on a strategy for: a) making CDM a more 

viable tool to finance transport interventions; 

and b) to ensure the development of improved 

clean transport funding mechanisms under 

the forthcoming climate change negotiations. 

Representatives from Designated National 

Authorities, Designated Operating Entities, 

International Development Agencies, investors, 

transport operators, transportation agencies 

and non-governmental organizations, as well as 

transport and environment experts from Asia, 

Europe, Latin America and North America, are 

participating in this effort, which has been led 

by the Clean Air Institute, with support from the 

Carbon Fund Assist Program (CF-Assist). 

The current project-based approach for 

CDM is having a limited impact on the 

transportation sector…… Developing 

methodologies to capture accurately the 

complexities of urban transport, at the 

project level, has proved to be very complex, 

time-consuming and costly. 

The aim is to identify the decisions and actions 

necessary to enhance the effectiveness of CDM 

in the transportation sector, and to propose 

an action plan for strengthening the overall 

framework for CDM for 2012 and beyond. 

In general terms, this has consisted in a review 

of the CDM framework as related to projects, a 

consultation meeting held in Washington DC, 

and a CDM & Transport workshop held in Berlin 

in June 2008. 

Nearly 60 participants representing a broad 

spectrum of carbon finance stakeholders were 

involved in the consultation process. In addition, 

the Clean Air Institute consulted with nearly 25 

international experts, including international 

transport and environmental specialists, staff 

from the World Bank and the Inter-American 

Development Bank, project proponents, bilateral 

agencies and private-sector organizations, as well 

as a CDM Methodology Panel member. 

Some of the major findings to emerge from these 

processes are as follows: 

• The current project-based approach for 

CDM is having a limited impact on the 

transportation sector. Moreover, even if 

successful, the impact of individual CDM 

transport projects is relatively small. Developing 

methodologies to capture accurately 

the complexities of urban transport, at the 

project level, has proved to be very complex, 

time-consuming and costly. 

• The determinations of the baseline scenario 

and the demonstration of additionality 

are the most significant barriers to developing 

CDM transport projects. There are 

also significant challenges regarding the 

reliability and availability of data, as well 

as the capacity for data collection in the 

transport sector. 

• The current CDM process should be made 

more attractive for project proponents and 

investors by broadening its scope, simpli- 

114 


fying and improving data collection and 

methodologies, and removing or minimizing 

barriers, such as the additionality requirement. 

For example, there is the possibility 

to use the “first of its kind” approach 

(an existing provision under the current 

CDM procedure) to meet the additionality 

requirement. 

• Any effort to improve the existing CDM 

program should serve as a basis for creating 

more effective instruments for the 

transport sector for post-2012. In general, 

the new instruments should be top-down, 

of broad scale, specific to the transport 

sector, account better for co-benefits, and 

foster the incorporation of climate change 

considerations into local and national policies 

and policy instruments. 

As a result of these findings, a Strategy on CDM 

and Transport (the Berlin Strategy for short) was 

proposed. The Berlin Strategy is organized in two 

parts. First, a set of reforms and new programs 

should be adopted within the existing CDM 

framework. Secondly, new carbon finance instruments 

should be developed for the post-Kyoto 

era. 

Since Berlin, stakeholders have continued to meet 

and are moving forward, using the Berlin Strategy 

as the foundation to persuade the Conference 

of Parties (COP) to improve the ability of the 

transport sector to receive carbon financing. 

As an example, the Clean Air Institute (CAI) 

recently participated in the Asian Development 

Bank Transport Forum, which was held in Manila 

from September 8-12, 2008. During that week, 

discussions were held with key stakeholders 

regarding the recommendations related to 

CDM and transport and how to translate those 

recommendations into action. As a result of those 

discussions, the strategy developed in Berlin was 

““…the present system of mobility is not 

sustainable, nor is it likely to become so 

if present trends continue. Societies need 

to act to alter their direction. This is true, 

in particular, if mobility is to be made 

sustainable in the developing world.” 

World Business Council for 

Sustainable Development 

World Business Council for Sustainable Development 

enhanced and then presented at the last day of 

the Forum. 

There is a consensus among stakeholders about 

the importance of submitting the Berlin strategy 

outlined above at COP 14 to be held in Poznan 

in December 2008. In order to be discussed and 

adopted by the COP 14, the Berlin Strategy is in 

the process of being translated into a proposed 

draft decision document containing the necessary 

directives to be issued. Furthermore, the 

decision document is intended to contribute 

for discussions to be held in the COP 15 in 

Copenhagen in 2009, where a new climate 

change framework is to be discussed. 

CDM transport projects and methodologies 

Transportation was set as a priority for the 

CDM by the COP 10 held in Buenos Aires in 

2003. Unfortunately, four years after COP 10, 

transport is still not well represented in the 

CDM project portfolio. Of the roughly 1191 CDM 


115 


projects registered by November 2008 according 

to the UNEP Risø Pipeline (see http://www. 

cdmpipeline.org), there are only two involving 

urban transport: 

• The first project to be registered was Trans- 

Milenio (Phase II to IV), which is a Bus Rapid 

Transit System (BRT). A BRT is a highcapacity 

bus system that delivers efficient, 

safe, rapid services through dedicated 

lanes, rapid boarding, enclosed stations, 

real-time information displays, etc. 

• The second transport project activity to be 

registered under the CDM is a small-scale 

project in India using the AMS-III-C methodology. 

The Delhi Metro Rail Corporation 

installed low GHG-emitting rolling stock 

(Metro locomotives and coaches), which 

have a regenerative braking system that improves 

energy efficiency. 

Table 1 provides additional information of these 

CDM-registered projects. 

Currently, five transportation-sector methodologies 

have been approved by the CDM Executive 

Board, which are shown in Table 2. There are still 

no CDM projects approved for three of these five 

methodologies. 

There appears to be a growing consensus that the 

CDM, as currently structured, is not well suited 

as a financing mechanism for sustainable urban 

transportation in developing countries. 

Table 1 

Public Transport CDM Projects Registered by the CDM Executive Board 

Registration 

date 

Description 

Methodology 

and scale 

Host 

Parties 

Other 

parties 

Reductions 

Ton/year 

07 Dec 06 BRT Bogotá, 

Colombia: 

TransMilenio Phase 

II to IV. 

AM0031 

(large scale) 

Colombia 

Switzerland 

Netherlands 

246,563 

29 Dec 07 Installation of Low 

Green House Gases 

(GHG) emitting 

rolling stock cars in 

metro system 

AMS-III-C 

(small scale) 

India Japan 41,160 

Total emissions reduced (tons/year) 287,723 

Source: CDM Executive Board. 

116 


Table 2 

Transport Sector Methodologies approved by the CDM Executive Board 

Methodology 

Number 

Description 

AM0031 

(large scale) 

Applicable for the construction and operation of a BRT system for urban road-based 

transport, as well as extensions of existing BRT systems. The BRT methodology is the only 

large-scale methodology in the transport sector. 

AM0047 

(large scale) 

Production of biodiesel based on waste oils and/or waste fats from biogenic origin for use 

as fuel – Version 2 

AMS-III-C 

(small scale) 

“Emissions Reduction by Low GHG Emitting Vehicles” 

AMS-III.T 

(small scale) 

“Plant Oil Production and Use for Transport Application” 

AMS-III.S 

(small scale) 

“Introduction of Low Emission Vehicles to Commercial Vehicle Fleets.” 

Source: CDM Executive Board. 

Key Barriers to CDM Project Development 

Two proximate types of reasons explain the lack 

of CDM projects in the transport sector: 

1. It is much more complex to deal with diffuse 

transport-sector emissions than with 

stationary sources. Moreover, in the transport 

sector, there are different types of 

sources, multiple actors and emissions, 

which depend on utilization conditions. 

2. The current CDM procedures are very complex 

and not well adapted to the sector. 

For a project to be eligible, it has to demonstrate 

that is able to achieve “real, measurable and 

additional reductions”. For a project to be 

registered, the project proponents should 

(Dalkman, 2007): 

• Set a baseline, which is the scenario representing 

the greenhouse gas emissions 

that would occur in the absence of the proposed 

project activity. 

• Prove project additionality, which implies 

that project proponents should demonstrate 

that the emissions reductions 

achieved are proved to be additional to any 

that would occur in the absence of the certified 

project activity. 

• Identify and calculate leakage, which 

should describe the net change in green- 


117 


house gas emissions which occurs outside 

the project boundary, and which is measurable 

and attributable to the CDM project 

activity. 

Setting the project baseline and proving 

additionality are difficult tasks because it is 

hard to demonstrate that a transport project is 

being implemented because of climate change 

considerations. First, it must be demonstrated 

that, within the project activity, GHG emissions 

are reduced to a level below what would have 

occurred in a “business as usual” situation. 

Then, a test must be run to identify the financial 

barriers that would prevent the implementation 

of the proposed project activity. But the financial 

impact of the CDM registration is very limited, 

and the results of the barrier analysis are 

usually not considered convincing because the 

carbon credits usually represent less than 2% 

of the infrastructure investment. Under these 

circumstances, in most cases there are difficulties 

in demonstrating that a project would not have 

proceeded without CDM. 

In addition, there are also significant challenges 

regarding the reliability and availability of data, 

as well as the capacity for data collection in the 

…the financial impact of the CDM 

registration is very limited, and the results 

of the barrier analysis are usually not 

considered convincing because the carbon 

credits usually represent less than 2% of 

the infrastructure investment. Under these 

circumstances, in most cases there are 

difficulties in demonstrating that a project 

would not have proceeded without CDM. 

transport sector. Studies are proportionally 

expen sive compared to project costs. In some 

cases, the data required is limited or even does not 

exist. There also are complexities associated with 

estimating key indicators, such as projections of 

the number of passengers to be transported or 

the expected mode switch. 

Data complexities are exacerbated in projects that 

address fundamental structural changes such as 

infrastructure projects. These challenges could 

create overwhelming barriers to CDM project 

development in the vast majority of developing 

countries, especially those with poor data and 

low experience and capacity (Barías et al., 2005; 

Dalkmann et al., 2007). 

Opportunities for improvement 

within existing CDM framework 

The current project-based approach for CDM is 

having a limited impact on the transportation 

sector. Developing methodologies to capture 

accurately the complexities of urban transport 

at the project level has proved to be very 

time-consuming and costly. Moreover, even 

if successful, the impact of individual CDM 

transport projects is relatively small. Attempting to 

measure emissions reductions at the project level 

is narrowly focused and prone to measurement 

errors, and thus not an appropriate approach for 

the transport sector. 

Suggestions for improving the CDM as it relates 

to transport resulting from this international 

effort range from pursuing innovations within 

the existing CDM framework to developing 

programmatic and sectoral approaches, and 

creating an improved mechanism post-2012. 

In general, the current CDM process should be 

made more attractive for project proponents and 

118 


investors by broadening its scope, simplifying and 

improving data collection and methodologies, 

and removing or minimizing barriers, such as the 

additionality requirement. 

It is possible to use the existing “first of its kind” 

approach to meeting the additionality requirement. 

Under “first of its kind,” a new type of project or 

approach can be deemed to meet the additionality 

requirement if no (or limited) project activity of 

its type is operational in the region or country. 

For example, relatively few cities have extensive 

BRT networks, and a convincing argument can be 

made that a certain number of new BRT projects 

could be deemed “first of their kind.” 

The “first of its kind” approach should be pursued 

for the transport sector and presented to the 

Methodologies Panel. There are significant issues 

regarding how to implement the “first of 

its kind” approach, including an estimate of 

baselines for each project, and these issues 

should be addressed promptly for discussion 

with the Methodology Panel. 

Developing programmatic and 

sectoral approaches 

A Program of Activities (PoA) is made up of CDM 

Programme Activities (CPAs). CPAs are similar 

to project activities that: a) apply the same 

approved baseline and monitoring methodology; 

and b) involve one type of technology or set of 

interrelated measures. Multiple CPAs can be 

included under a PoA at the time of registration, 

and additional CPAs can be added at any point in 

the life of the PoA. 

The PoA has its origins in a decision of the COP/ 

MOP that local/regional/national policies or 

standards cannot be considered as CDM project 

activities, but that project activities under a PoA 

Program of Activities 

A Programme of Activities (PoA) 

-often called Programmatic CDM)- is: 

• a voluntary action 

• coordinated by a private or public entity 

• implementing a policy/measure or stated goal (i.e. 

incentive schemes and voluntary programmes), 

• resulting in mensurable GHG emission reductions 

or avoidance that are additional to any that would 

occur in the absence of the PoA. 

Source: http://cdmrulebook.org/pageID/452http://cdmrulebook.org/ 

can be registered as a single CDM project activity, 

provided that: 

• approved baseline and monitoring methodologies 

are used that, inter alia, 

• define the appropriate boundary, avoid 

double-counting and account for leakage, 

• ensuring that the emission reductions are 

real, measurable and verifiable, and additional 

to any that would occur in the absence 

of the project activity 

The approval of programmatic projects currently 

appears to be as complicated as the project-based 

approach, and additionality continues to be a barrier. 

An improved standard transport methodology 

could be developed for its application to a PoA. The 

implementation of the programmatic approach 

for transport should simplify data requirements, 

improve data collection, and minimize barriers 

such as the additionality requirement. There 

is a need to explore further how to design a 

POA consisting of individual projects under 


119 


an integrated sustainable transport program 

approach, such as public transport pedestrian 

and bicycle improvements, improved land use, 

transport demand management and freight 

management, as well as technology and fuel 

improvements. 

The transition from the current project-based 

approach to a broader programmatic or sectoral 

approach should be accomplished in phases. For 

example, the first phase could be a methodology 

applied to the public transport system of a city. 

Once a methodology has been verified, other 

transport programs or systems could be added to 

the methodology. 

Berlin Strategy: Improving CDM and 

scaling up financial instruments 

A two-part strategy is proposed and should be 

pursued in parallel (see Figure 1). First, a set of 

reforms and new programs should be adopted 

Figure 1. 

Berlin Strategy: Improving CDM as a first step to scale up Carbon Finance Sustainable Urban Transport 

120 


within the existing CDM framework. These 

reforms and programs should be designed to: 

a) enhance the ability of CDM as an instrument 

to promote sustainable transport interventions; 

and b) improve the ability of project proponents 

to successfully pursue transport CDM projects. 

Secondly, a new mechanism should be developed 

for the post-Kyoto era that is specific to the 

transport sector; uses a broad scale rather 

than a project-specific methodology; takes into 

account the co-benefits of transport projects, 

such as improved air quality, human health, and 

economic opportunity; and encourages cities 

to link local transport planning with planning 

for greenhouse gas emissions reductions, perhaps 

through a combination of regulatory 

requirements and incentives. 

A three-phase program could be implemented to 

facilitate the actuation of this two-part strategy. 

In Phase I, a program of activities would be 

developed under the existing CDM framework 

and a standardized methodology would be 

applied to that program, taking advantage of 

the “first of its kind” methodology to meet the 

additionality test. A limited number of cities 

would be selected to pilot the methodology. A 

technical assistance program would be created 

to support the development of better baselines 

and monitoring capabilities, including data 

collection and management. 

In Phase II, more detailed data would be 

collected and data gaps identified in the pilot 

cities. International financial organizations 

would collaborate to begin integrating the 

methodological framework into lending practices, 

and cities would be encouraged to begin 

integrating the methodology into their transport 

planning. An international fund to support data 

collection, tools development, mitigation options, 

research and mainstream should be established 

to support these efforts. 

In Phase III, the results from the pilot cities would 

be validated. Assuming successful validation, 

methodological guidelines would be developed 

for use by other cities. Moreover, lessons learned 

from the program would be used to develop 

recommendations for approval by the COP and/ 

or the Executive Board post-2012. 

Scaling-up finance to foster 

sustainable urban transport 

The major challenges of the new global agreement 

on climate change to be discussed at the COP 15 

in Copenhagen by the end of 2009 are the role 

that developing countries will play in the global 

mitigation effort and the adoption of appropriate 

financing mechanisms (DEFRA 2008). 

According to the UNFCCC, to get global emissions 

in 2030 back to today’s levels, the additional 

investment and financial flows (I&FF) required 

are estimated to be around US$200-210 billion. 

The transport sector will require 42-44% of this 

I&FF (UNFCCC 2007). 

Instruments like CDM in its current form appear 

to be insufficient to reach these funding 

requirements, since they lack the scale needed 

by several orders of magnitude. There are claims 

that traditional sources of funding, like the funds 

administered by the GEF, are inadequate for 

this purpose because “they fail to link funding 

with performance or success; they are typically 

slow and cumbersome; and they lack the scale 

necessary” (DEFRA 2008). 

Scaling up the magnitude requires significantly 

broadening the scope of policy instruments to 

address climate change issues. Among other 


121 


Box 1 

Sectoral Approach Models 

The IEA has identified four models of sectoral approaches: 

1. No-lose sectoral targets and crediting 

mechanism. Developing countries adopt 

non-binding quantitative sectoral goals. Excess 

emission reductions are eligible as credits 

to be sold to industrialized countries to help 

them meet their fixed and binding targets. 

2. SDPAMs or policy-based instruments . Sectorspecific 

policies and measures in developing 

countries that have sustainable development 

as primary objective (SD-PAMs). It provides 

funding for SD-PAMs that reduce emissions 

beyond Business As Usual. It should be done 

with measurable, reportable and verifiable 

(MRV) actions. Binding or non-binding 

3. Transnational sectoral agreements. Transational 

agreement for a given industry 

The substance of these agreements is the 

adoption of quantitative and/or qualitative 

goals. This model is oriented to foster concerted 

Research and Development (R&D) effort. 

urgent decisions, it is necessary to adopt a strategic 

program approach to low carbon investments, 

which has to be able to aggregate on-the-ground 

activities in an unprecedented manner. 

Any effort to improve the existing CDM program 

should serve as a basis for creating more effective 

instruments for the transport sector post-2012. 

In general, these instruments should be programoriented, 

of broad scale and not project-specific. 

The new instrument should: 

• Be specific to the transport sector rather 

than of broad applicability, as with the current 


• Better account for national and local benefits 

and the project’s contribution to sustainable 

development. 

• Seek to integrate planning for CDM projects 

with transport and urban planning for 

cities by focusing on improving accessibility 

rather than just mobility. 

• Foster the incorporation of climate change 

considerations into local and national policies 

and policy instruments to encourage 

emissions reductions in the transport sector 

more strongly. 

The IEA has identified four models of sectoral 

instruments that in conjunction can help to scale 

up financing in those sectors and sources where 

an abatement potential exists in developing 

countries (see box 1). One of these models is 

the Sector No-Lose Targets (SNLT’s). SNLTs 

are conceived as a scaled-up carbon finance 

mechanism, major features of which are (DEFRA 

2008): 

• It is based on ‘cap and trade’ emissions trading 

schemes for industrialized countries, 

complemented by schemes that allow credits 

to be generated through emissions reductions 

and sink enhancement activities in developing 

countries. 

• Targets would be adopted voluntarily by some 

developing countries for particular sectors. 

The ‘no lose’ feature means that developing 

countries would not face compliance penalties 

if they did not meet their SNLTs. 

• Targets would be agreed as part of a quantitative 

multilateral agreement. 

• The concept of additionality would no longer 

apply because the fixed and binding targets 

of industrialized countries would be set in 

the light of the scale of credits that would be 

122 


expected to be generated by SNLTs from developing 

countries. 

• So, SNLTs (and the credits that may stem from 

them) are explicitly accepted and factored 

into the elements of the overall agreement 

that set a quantitative emissions outcome. 

• It could adopt ‘compliance carbon’ crediting 

‘tools’ from the existing ‘regular’ projectbased 

CDM and now programmatic CDM to 

new CDM models such as sectoral or policy 

CDM, which can be applied to SNLTs. 

• It should be seen as part of a set of policy 

tools to support developing countries as a 

‘compliance carbon’ policy tool. 

• It can complement the other sectoral instruments, 

such as the SD-PAMs. 

Whether the SNLTs are to be feasible for the 

transport sector requires an in-depth analysis. 

As with other credit-based mechanisms it is 

necessary with SNLTs to establish a baseline 

and then to measure (and report and verify) 

performance against this. 

Towards a separate funding stream for 

transport-sector climate mitigation actions 

The transport sector needs to improve its visibility 

at the climate negotiations and make a case for 

a separate funding mechanism for mitigationrelated 

activities. This global transport climate 

change mitigation fund would pay for at least two 

types of work: 

1. Worldwide research particularly focused at 

the developing world to support an integrated 

evaluation of transport and spatial/ 

urban policy options, as well as to monitor 

their implementation. 

2. Ample funding of activities to incorporate 

climate change mitigation and other cobenefit 

consideration as part of the regional 

and metropolitan planning, investment 

prioritization, long-term budgeting, etc. 

This funding should be independent from 

particular investment projects by international 

development agencies. 

Conclusions 

The purpose of CDM is not being achieved in 

the transport sector. There are opportunities to 

improve the effectiveness of CDM by broadening 

its scope and simplifying its rules. 

There is an urgent need to couple the institutional 

mechanisms of interaction between the North 

and the South on climate change mitigation, and 

the needs of the transport sector. 

The transport sector in particular should have 

a stronger seat at the table in Poznan and 

beyond. This could mean having a stronger 

push within national governments to 1) develop 

a better understanding of climate change within 

transport ministries, and 2) greater involvement 

of transport ministries at climate negotiations. 

Any effort to improve the existing CDM 

program should serve as a basis for 

creating more effective instruments for the 

transport sector post-2012. In general, 

these instruments should be programoriented, 

of broad scale and not projectspecific. 

For the first time, a group of multi-stakeholder 

representatives is joining efforts to improve the 

future of CDM as related to the transport sector. 


123 


In addition to CDM-related measures, there is 

an urgent need for international development 

organizations to establish sound instruments 

to prevent and reduce GHG emissions from 

transport investments. International financial 

organizations could play a key role by 

establishing such instruments and by changing 

lending practices to encourage more sustainable 

transportation projects. 

There is a strong desire for the World Bank or other 

international organizations to assume leadership 

and to make the appropriate investments to 

ensure that these reforms are accomplished. Key 

stakeholders need to be actively involved in the 

development of these reforms. 

Ultimately, the transport sector needs to have 

a higher profile in climate negotiations. The 

development of increasingly effective instruments 

for transport is essential to achieving climate 

goals. 

Sergio Sanchez is the Executive Director of the Clean Air 

Institute, a non-profit organization involved in global and 

Latin American projects and initiatives on both climate 

change and air quality. He has also consulted for international 

organizations, such as the World Bank, Pan American Health 

Organization, and the Massachusetts Institute of Technology. 

References 

Barías, Jose Luis, Jodi Browne, Eduardo Sanhueza, Erin Silsbe, Steve Winkelman, 

Chris Zegras, Jose Luis (2005): Getting on Track: Finding a Path 

for Transportation in the CDM. Final Report. International Institute for 

Sustainable Development (IISD). Winnipeg, Manitoba, Canada. (http:// 

www.iisd.org/publications/pub.aspx?id=690). 

Clean Air Institute (2007). Draft Clean Air Strategy for Latin America 

and the Caribbean. Washington DC. (http://www.cleanairnet.org/ 

lac_en/1415/article-72110.html). 

Clean Air Institute (2008). Draft Report and Strategy to Improve the 

Effectiveness of CDM to Foster Sustainable Transportation. Prepared for 

the Carbon Fund Assist Program of the World Bank Institute. Washington 

DC. 

Dalkmann, Holger, Wolfgang Sterk, Daniel Bongardt, Bettina Wittneben, 

Christian Baatz (2007): The Sectoral Clean Development Mechanism: A 

Contribution from a Sustainable Transport Perspective. JIKO Policy Paper. 

Wuppertal Institute for Climate, Environment and Energy. Wuppertal, 

Germany. 

Intergovernmental Panel of Climate Change (2007). Climate Change 

2007. Synthesis Report. An Assessment of the Intergovernmental Panel 

on Climate Change, Adopted section by section at IPCC Plenary XXVII. 

Valencia, Spain, 12-17 November 2007. 

Molina Mario, Molina Luisa et al (2002). Air Quality in the Mexico Megacity: 

An Integrated Assessment. Series: Alliance for Global Sustainability 

Bookseries , Vol. 2. 

UNFCCC (United Nations Framework Convention on Climate Change) 

(2008). Investment and Financial Flows to Address Climate Change. 

Bonn. 

Ward, Murray. Streck, Ch., Winkler, Harald, Jung, M., Hagemann, M., 

Hoehne, N., O’Sullivan, R (2008). The Role of Sector No-Lose Targets in 

Scaling up Finance for Climate Change Mitigation Activities in Developing 

Countries. Department for Environment, Food and Rural Affairs (DEFRA). 

United Kingdom. 

World Resources Institute (2005). Navigating the numbers. Washington, 

D.C. 

Zegras, Christopher P. As if Kyoto mattered: The clean development 

mechanism and transportation. Energy Policy, Vol. 35, No. 10. (October 

2007), pp. 5136-5150. 

Contact: ssanchez@cleanairinstitute.org 

124 



125 


126 


Anne Arquit Niederberger, PhD 

Policy Solutions, USA & Switzerland’ 

Scaling Up Energy Efficiency 

under the CDM 

Abstract: 

This paper analyses the barriers to end-use energy 

efficiency under the CDM, presents elements of a 

new shared vision for a CDM that will encourage 

end-use energy efficiency and suggests necessary 

reforms in the international climate framework that 

go beyond the traditional conception of CDM 

reform. For the CDM to achieve its dual mitigation 

and sustainable development objectives, the Parties 

to the UNFCCC can no longer be satisfied with the 

perfect environmental integrity of a zero-sum CDM 

at the expense of real action on end-use efficiency. 

Nothing short of a global energy efficiency 

offensive is needed in Copenhagen in 2009. 

Whereas the Clean Development Mechanism 

(CDM) has proved effective with respect to the 

objective of assisting industrialized countries 

achieve compliance with their emission reduction 

commitments, a strategic vision of the CDM to 

address the drivers of greenhouse gas emissions 

growth and contribute to the sustainable 

development of poor countries is lacking. 

Furthermore, the CDM has been a disappointment 

for many developing countries. India, China, 

Brazil and Mexico host 75% of the total number 

of registered projects, whereas 90% of CERs 

have been issued to China, India, South Korea 

and Brazil. This concentration has left Least 

Developed Countries, Small Island Developing 

States and Sub-Saharan African countries 

with a very thin slice of the carbon market. Yet 

energy efficiency projects have huge potential 

127 


in countries worldwide, including the poorest 

– and efficient use of energy may contribute to 

economic development and poverty alleviation. 1 

Nonetheless typically small and dispersed enduse 

efficiency projects face a number of barriers, 

both general and CDM-specific. As a result, 

only eighteen energy demand projects (Sectoral 

Scope 3) have been registered to date in only 

five different countries, representing 1.5% of 

all CDM projects and an even smaller share of 

issued CERs.2 This level of performance stands 

in stark contrast to mitigation scenarios, which 

typically ascribe a dominant share of mitigation 

in the coming decades to end-use efficiency. Action 

is clearly needed to scale up carbon finance 

for end-use efficiency. 

This paper analyses the barriers to end-use 

energy efficiency under the CDM to date, presents 

elements of a new shared vision for a CDM that 

will encourage end-use energy efficiency and 

suggests necessary reforms in the international 

framework that go far beyond the traditional 

conception of CDM reform. 

The Bali Road Map process has yet to acknowledge 

clearly the significance of energy efficiency 

as a primary means of mainstreaming climate 

mitigation and capitalizing on global convergence 

in brokering an effective climate deal. The 

Copenhagen agreement must provide the foundation 

for a global energy efficiency offensive, 

with the CDM as only one tool. 

A Drop in the Bucket 

The Clean Development Mechanism has resulted 

in 1152 registered projects, for which 183 million 

certified emission reductions 3 (CERs) have 

been issued, as well as a pipeline of another 

2667 projects that are at the validation stage or 

have requested registration 4 (UNEP Risø CDM 

Pipeline, 2008). 

With respect to end-use energy efficiency, the 

amount of CERs issued is miniscule compared 

to the vast savings potential. The amount of 

cumulative CERs expected to be issued through 

2012 from the end-use energy efficiency projects 

that have been registered to date under the CDM 

is 9.68 million CERs 5 (Figure 1). In contrast, the 

International Energy Agency (IEA) has issued 

a series of 25 energy efficiency policy recommenda 

tions, which could save around 8.2 GtCO 2 

annually by 2030 (IEA, 2008). Even if we assume 

that all end-use efficiency projects currently in 

the pipeline will be registered and deliver CERs 

according to design specifications, the total 

cumulative emission reductions from end-use 

efficiency CDM through 2020 only amount to 72 

million tons of carbon dioxide. 

Taking China (the largest supplier of CERs) 

as an example, 90% of issued CERs stem from 

industrial HFC projects (UNEP Risø CDM 

Pipeline, 2008). The CDM therefore has had 

very little documented impact on key drivers 

1 The most common energy-related issue raised in national 

MDG reports is energy efficiency, not renewable energy or access 

to energy (Takada and Fracchia, 2007). 

2 If we use the UNEP Risø CDM Pipeline end-use efficiency 

categories EE Household, EE Service and EE Industry (some of 

which correspond to other sectoral scopes), the fifty registered 

(plus project at validation) end-use efficiency projects represent 

just over 4% of all projects, but only 1.3% of expected CERs in 

2012, as a result of their typically small size (UNEP Risø CDM 

Pipeline, September 2008). 

3 Each CER represents one ton of carbon dioxide equivalent 

greenhouse gas emissions reductions. 

4 Status as of 1 September 2008. 

5 Included are the UNEP Risø CDM Pipeline (2008) categories 

EE Household (3 registered projects), EE Industry (45 

registered projects) and EE Service (2 registered projects). If we 

consider the sectoral scope 3 (energy demand) category alone, 

only 18 projects have been approved, 9 rejected and a Request 

for Review submitted for two others. 

128 


Figure 1. Projected Cumulative CERs for Energy Efficiency 

CDM Projects in 2012 and 2020 

In the area of energy efficiency, the Government 

of China set a goal to reduce energy intensity per 

unit of GDP by 20% between 2006 and 2010. 

The government has begun to implement ten key 

energy-saving programmes. According to China’s 

National Climate Change Programme (CNCCP), 

these ten programmes are expected to result in 

550 million tons of CO 2 

reductions during the 

11 th Five-Year Plan (FYP) period (GOC, 2008). 

The CDM has contributed to only one of these 

programs, namely waste heat and gas (WHG) 

recovery and utilization. Of China’s 22 registered 

projects (which represent one-third of the global 

total), two projects have so far generated 768,000 

Data Source: UNEP RISØ CDM PIPELINEUNEP RISØ CDM PIPELINE 

(2008). 

of China’s greenhouse gas emissions growth, 6 

which, in light of ongoing standard-of-living 

improvements, can only be curbed through 

greater energy efficiency, the decarbonization 

of energy supply and economic restructuring. 

The additional investments into CDM and the 

resulting several hundred projects currently 

under implementation represent a limited 

contribution to the challenge of transforming 

the Chinese energy system, measured against 

China’s own energy policy goals and intentions 

to develop a low-carbon economy. 

6 With the available high-volume HFC destruction opportunities 

using methodology AM0001 already realized, the potential 

share of CERs from methane and carbon dioxide reduction 

projects in the Chinese pipeline is growing. Given the dominance 

of carbon dioxide in China’s GHG emissions inventory, as well 

as the typically better sustainability of energy efficiency and 

renewable energy projects that dominate the carbon dioxide 

reductions, this is a welcome development. 

…end-use efficiency projects face a number 

of barriers, both general and CDM-specific. 

As a result, only eighteen energy demand 

projects (Sectoral Scope 3) have been 

registered to date in only five different countries, 

representing 1.5% of all CDM projects and 

an even smaller share of issued CERs 

CERs 7 halfway through the 11 th FYP period (Table 

1). There has been little or no CDM activity in 

other key end-use areas, such as electric motor 

systems, industrial process efficiency, building 

energy efficiency or high-efficiency lighting, 

which are targeted for large energy savings. 

Similarly, the CDM is making only a minor 

contribution (less than 1%) to achieving the other 

targets set out in the CNCCP with the exception 

of wind power. Wind power has received a boost 

7 These two projects are expected to generate 34 million 

CERs by 2012 and nearly 80 million CERs by 2020. However, 

their issuance success (ratio of CERs actually issued to expected 

CERs according to the Project Design Document) has been only 

52% and 61% respectively (UNEP Risø CDM Pipeline, September 

2008). 

Scaling Up Energy Efficiency under the CDM 

129 


Table 1. China’s Emission Reduction Targets 2006-10 and CDM Contribution (as of 1 September 2008) 

Sector/Technology 

CNCCP Reduction Goal 

Issued CERs 

CO2e) 

(Mt 

CDM Contribution to 

Target (%) 

10 Key Energy Conservation Programs 550 Mt CO2 0.768 0.14 

Hydropower 500 Mt CO2 1.058 0.21 

Coal-bed and coal–mine methane 200 Mt CO2e 0.638 0.32 

Advanced thermal power generation 110 Mt CO2 0* * 

Other renewable energy (wind, solar, 

geothermal, tidal) 60 Mt CO2 2.401 4.00 

Biomass, biogas and liquid fuel 30 Mt CO2e 0.024 0.08 

Increased carbon sink (aforestation, 

reforestation, grassland/forest protection) 50 Mt CO2e 0 0 

* There is some overlap with the technologies mentioned in this category (particularly in the area of co-generation) with the energy conservation category 

(where we account for all CERs derived from use of waste heat or gas for self-generation). No CERs have been issued for other supply-side technologies 

mentioned in the CNCCP, such as small-scale distributed natural gas, advanced power transmission/ transformation/distribution technologies, or 600 MW 

or larger supercritical and ultra-supercritical combined-cycle thermal power plants. 

Sources: China’s National Climate Change Programme (2008); UNEP RISØ CDM PIPELINE (2008) 

from the landmark Renewable Energy Law of 

the Peoples’ Republic of China, which entered 

into force on 1 January 2006 (and subsequent 

regulations) and for which 2.4 million CERs 

have already been issued (representing 4% to 

achievement of the CNCCP target for “other” 

renewables). 

Furthermore, CDM activities have had scarcely 

any impact on the main areas of concern in 

China, namely coal-fired power generation, 

energy-intensive industry (with the exception 

of WHG projects), buildings and transportation. 

So, the question is whether the CDM can play 

a more significant role in China’s and other 

countries’ transitions to an efficient and lowcarbon 

economy. 

The picture is similar for other developing 

countries. India recently issued its National 

Action Plan on Climate Change (GOI, 2008), 

which pointed to priority mitigation areas, such 

as solar thermal and PV generation, industrial 

energy efficiency and fuel switching, energy 

efficiency in the residential and commercial 

building sector, management of municipal solid 

waste, and promotion of urban public transport. 

Although the plan did not set national CO 2 

reduction targets for these priority areas, it is 

clear that the number of CERs issued to date is 

limited compared to the potential. Neither solar 

thermal and PV nor transport-sector projects 

have generated any CERs – and only a single 

small-scale project has been registered under 

each of these priority categories. Similarly, only 

2000 CERs have been issued for the single 

registered building efficiency project and 

76,000 CERs for one of the three registered 

landfill gas projects. Compared with other 

countries, there has been relatively greater CDM 

activity in India’s industrial sector, both end-use 

efficiency and WHG projects. Nearly 6.5 million 

130 


CERs have been issued from sixteen waste heat 

and gas recovery projects, predominantly in the 

iron and steel sector, 527,000 CERs from sixteen 

end-use efficiency projects – although these 

are predominantly small industrial efficiency 

projects with annual emission reductions of less 

than 30 kCERs – and 794,000 CERs from five 

fuel switch projects (four of which are industrial 

captive power plants). 

Barriers to End-Use Energy 

Efficiency under the CDM 

End-use energy efficiency is of particular interest 

in the context of developing country contributions 

to mitigation, since such activities can make an 

important contribution to economic and social 

development, while mitigating greenhouse gas 

and local pollutant emissions at relatively low cost. 

So why are these projects not being developed 

under the CDM? One reason is the design of the 

CDM itself and how the CDM provisions are being 

interpreted and applied in practice. 

The Parties to the Kyoto Protocol have agreed 

that the CDM must result in emission reductions 

that are: 

• Additional: A CDM project activity is additional 

if anthropogenic emissions of 

greenhouse gases by sources are reduced 

below those that would have occurred in 

the absence of the registered CDM project 

activity. 

• Measurable and directly attributable: A 

Designated Operational Entity must certify 

that the project activity achieved the 

verified amount of reductions in anthropogenic 

emissions by sources of greenhouse 

gases. 

These rules treat the CDM as a zero sum game 

for the climate system at best, and are therefore 

Energy efficiency is often highly profitable on 

paper, and such projects have therefore had 

a tough time demonstrating additionality 

arising from financial and other barriers to 

the satisfaction of the CDM Executive Board 

not creating the necessary incentive for host 

countries to engage in the hard work of market 

transformation that is needed for sustained, 

large-scale change, such as introducing and 

rapidly updating mandatory equipment standards. 

Their interpretation and application has made it 

extremely difficult to leverage carbon finance for 

energy efficiency projects, particularly dispersed 

end-use efficiency projects with documented 

sustainable development benefits, for a number of 

reasons: 8 

• Energy efficiency is often highly profitable 

on paper (Reddy and Balachandra, 2006), 

and such projects have therefore had a 

tough time demonstrating additionality 

arising from financial and other barriers 

to the satisfaction of the CDM Executive 

Board. In fact, most end-use efficiency 

projects would fail a classical investment 

analysis; however, they face other pervasive, 

well-documented barriers too. Many of the 

29 responses to the CDM Executive Board’s 

recent Call for Public Inputs on a draft 

proposal for an enhanced barrier test for 

project activities that have potentially high 

profitability without CER revenues pointed 

to the need to promote energy efficiency 

projects under the CDM, not make it even 

more difficult to register them. 9 

8 Many of these issues have been raised previously (Arquit 

Niederberger and& Spalding-Fecher, 2006), but none has been 

adequately addressed. 

9 http://cdm.unfccc.int/public_inputs/2008/cers_rev/index. 

html 


131 


Table 2. Application of Approved Energy Demand Methodologies 

Methodology 

Methodology 

Number of 

Title 

Available Since 

Reference # 

Registered Projects 

6 December 2004 AM0017 

Steam system efficiency improvements by replacing steam 

traps and returning condensate 

0 

6 December 2004 AM0018 Steam optimization systems 10 

25 February 2005 AM0020 

Baseline methodology for water-pumping efficiency 

improvements 

0 

16 February 2007 AM0046 Distribution of efficient light bulbs to households 0 

30 November 2007 AM0060 

Power saving through replacement by energy efficient 

chillers 

0 

16 May 2008 AM0068 

Methodology for improved energy efficiency by modifying 

ferroalloy production facility 

0 

1 November 2002 AMS II.C. 

Demand-side energy efficiency activities for specific 

technologies 

4* 

1 November 2002 AMS II.E. Energy efficiency and fuel-switching measures for buildings 5* 

22 October 2004 AMS II.F. 

Energy efficiency and fuel-switching measures for 

agricultural facilities and activities 

0 

1 February 2008 AMS II.G. 

Energy Efficiency Measures in Thermal Applications of Non- 

Renewable Biomass 

0 

2 August 2008 AMS II.J. Demand-side activities for efficient lighting technologies 0 

*One project uses both AMS II.C. and AMS II.E. 

Source: UNFCCC CDM Database (http://cdm.unfccc.int/Projects/projsearch.html), status of approval of Sectoral Scope 3 methodologies and registration 

of projects applying these methodologies as of 30 July 2008. Note that some of the 31 projects that apply AMS II.D. (Sectoral Scope 4) also include 

end-use efficiency measures. Four additional large-scale methodologies in other sectoral scopes have been approved within the past year, but no registered 

project activities have made use of them. 

• Viable, widely applicable methodologies 

for end-use energy efficiency are lacking. 

As a result of the agreed “case-study” 

approach to methodology development, 

the CDM modalities and procedures 

did not provide consistent top-down 

guidance for “good practice” regarding 

the key methodological issues that are 

crucial to all types of energy end-use 

efficiency activities. Conversely, it has 

been difficult to have methodologies 

approved by the CDM Executive Board 

that are based on “good practice” 

ener gy-saving quantification methods 

used in large, government-supervised 

energy efficiency programmes, such 

as those run by utility companies and 

funded by ratepayer money. As a result, 

there is a lack of viable methodologies 

to support the wide array of end-use 

efficiency project types. The available 

energy efficiency methodologies have 

either narrow applicability, have proved 

impossible to apply in practice (in the 

case of large-scale methodologies, 

Table 2) or have relied on project-level 

monitoring of individual pieces 

of equipment (in the case of smallscale 

methodologies), which is neither 

cost-effective nor practical in many 

circumstances and discourages system 

efficiency improvements that yield the 

greatest energy savings. 10 Another trend 

10 Several small-scale methodologies allow for a systems approach, 

but these have proved to be difficult to apply in practice 

(refer to Table 2). One positive new develop ment was the 

approval of AMS II.J. in August 2008, which allows for energy 

savings and greenhouse gas emission reductions from efficient 

132 


is to burden existing small-scale end-use 

efficiency methodologies with additional 

requirements that would make them 

even less feasible under CDM Programs 

of Activities. 

• It is more difficult to determine baseline 

emissions for end-use efficiency activities 

– whether under retrofit or new 

construction situations – than it is for 

energy supply, fuel switching or other 

types of CDM project activities. This is 

partly due to the interpretation of CDM 

authorities that trends in efficiency 

should be taken into account in the 

project baseline estimation, whereas this 

is not common practice in the energy 

efficiency world and would appear to 

contradict the CDM Executive Board’s 

own clarification that national and/or 

sectoral host-country policies to reduce 

emissions that were implemented after 

11 November 2001 need not be taken 

into account in developing a baseline 

scenario (CDM-EB, 2005). 

• Although leakage is defined as the net 

change of anthropogenic emissions by 

sources of greenhouse gases which occurs 

outside the project boundary, 11 the CDM 

Executive Board and its panels have not 

allowed project developers to account for 

positive “spillover” effects, which can be 

particularly large for end-use efficiency 

programs. It is not uncommon for energy 

savings resulting from non-participants 

to exceed significantly the savings 

directly attributable to the programme 

lighting projects to be calculated using a “deemed” or “stipulated” 

savings approach, rather than monitoring the energy use 

and/or hours of operation of individual pieces of equipment in 

situ. 

11 UNFCCC document FCCC/KP/CMP/2005/8/Add.1 

(2006) 

participants themselves. A programme 

to offset the additional cost of energy 

efficient compact fluorescent lamps, for 

example, not only makes them affordable 

to programme participants, but can also 

result in economies of scale and retail 

price reductions that make the CFLs more 

affordable – and quality improvements 

via bulk procurement specifications that 

make CFLs more attractive – to all market 

participants (IIEC, 2007). 

• The potential CDM incentive is insufficient 

to cover transaction costs for 

typically small and often dispersed enduse 

efficiency actions. 

• The new Program of Activities (PoA) 

mode of CDM implementation, which 

was specifically designed to facilitate 

programmes to provide incentives for 

dispersed, small-scale actions such as 

end-use efficiency (Hinostroza et al., 

2007), has had a slow start since it was 

introduced over a year ago, with only one 

energy efficiency programme currently 

at the validation stage. In addition to the 

issues mentioned above, crucial market 

actors have been reluctant to embrace PoA 

– for example, DOEs are concerned about 

liability implications – and some DNAs 

have not created the legal framework 

to make it possible for them to issue 

letters of approval for PoA. Furthermore, 

potential PoA managing entities lack 

the necessary capacity. The recent CDM 

Executive Board Call for Public Input 

on PoA yielded 36 submissions 12 that 

highlight PoA implementation challenges 

and suggest various reforms. 

12 http://cdm.unfccc.int/public_inputs/2008/PoA/index.html 


133 


A more fundamental reason that end-use energy 

efficiency projects are not being developed under 

the CDM is that such projects face multiple 

barriers – some of which cannot be overcome 

with CER revenues or investment alone. 13 Ironically, 

whereas demonstration of additionality 

has proved to be a stumbling block for energy 

efficiency methodologies and project activities, 

non-CDM barriers have prevented numerous 

energy efficiency opportunities with short 

payback periods from attracting CDM investment 

in the first place. Unless a comprehensive 

approach is taken to address typical barriers to 

end-use energy efficiency in national planning 

processes, whereby goals, policies and budgets 

are set, it will be difficult for the CDM to unlock 

greater investment. This requires the adoption 

by host countries of a systematic framework for 

integrating energy efficiency performance objectives 

into national poverty-reduction strategies 

(Arquit Niederberger, 2006). 

A more fundamental problem with the Kyoto 

Protocol and Bali Roadmap frameworks is that 

the approach has been climate-centric, with 

an emphasis on climate commitments, carbon 

markets and technology, rather than concentrating 

on how best to mainstream climatefriendly 

choices into development planning to 

maximize co-benefits and transition towards a 

sustainable society (Shukla, 2008). Focusing on 

mobilizing resources to overcome performance 

barriers related to the delivery of energy services 

(rather than the traditional energy supply optic) 

will ensure that not only are the technology and 

investment “hardware” issues addressed, but 

also the all-important “software” issues (such as 

public awareness, behavioural change, human 

13 Arquit Niederberger and Brunner (2007) offer an example 

of such multiple barriers in the area of high-efficiency industrial 

electric motor systems, which are responsible for about 40% of 

electricity demand worldwide. 

and institutional capacity; and policies and 

measures), which are currently being neglected. 

A Shared Vision for Energy Efficiency CDM 

To transform markets so that the most energyefficient 

end-use equipment rapidly becomes 

business-as-usual in an ongoing process should 

be the major thrust of a global climate change 

mitigation strategy. These end-use technologies 

are available today. They have short payback 

periods, have the greatest potential for costeffective 

emissions reductions in the coming 

decades, can make decentralized renewable 

energy more viable, and have a range of sustainable 

development benefits. Achieving this vision will 

require coordinated efforts that go way beyond 

the traditional conception of CDM reform, 

including giving top priority to energy efficiency 

in the Bali Action Plan, adopting a new strategic 

vision of the function that the CDM can play in 

assisting developing countries in contributing 

to climate mitigation (as opposed to merely 

lowering compliance costs for industrialized 

countries), and adopting improvements to the 

CDM modalities and procedures. 

Bali Roadmap Process 

The negotiations have evolved from widespread 

early recognition of the importance of energy 

efficiency at the outset of the process to 

virtually no consideration of the importance of 

energy efficiency in the current negotiations. 

The discussions under the Ad Hoc Working 

Group on Further Commitments for Annex I 

Parties under the Kyoto Protocol (AWG-KP) are 

not considering energy efficiency to be one of 

the primary “means to reach emission reduction 

targets and ways to enhance their effectiveness and 

contribution to sustainable development”. Similarly, 

the related discussions on reforming the CDM 

134 


only refer to energy efficiency as a possible “cobenefit” 

of CDM project activities, rather than 

including reforms to facilitate end-use energy 

efficiency project activities under the CDM. 14 

With regard to the Ad Hoc Working Group 

on Long-term Cooperative Action under the 

Convention, Parties have noted that: 

nationally appropriate mitigation actions by 

developing countries should be considered in the 

context of sustainable development, economic 

growth and poverty reduction, and that support 

for technology, financing and capacity-building 

was needed to enable Parties to enhance their 

action, including through actions in specific 

sectors, in particular renewable energy and 

energy efficiency. 15 

Whereas this summary of Parties’ views emphasizes 

both the importance of energy efficiency and 

the fact that climate mainstreaming can only 

be achieved with support for the on-the-ground 

efforts of developing countries, the negotiations 

have yet to conceptualize the necessary building 

blocks for energy efficiency. 

A massive scaling up of investment in end-use 

energy efficiency will require six billion decisionmakers 

to change their investment and habitual 

behaviour, which is a challenging undertaking, 

as illustrated in Box 1. 

To achieve this, the Copenhagen agreement will 

have to include specific provisions to promote 

market transformation beyond the narrow context 

of CDM reform, including items such as: 

14 Overcoming the barriers to end-use efficiency under the 

CDM was not included in the list of 26 possible CDM reforms in 

FCCC/KP/AWG/2008/L.12, despite widespread recognition of 

the problem (Arquit Niederberger, 2008), including by the CDM 

Executive Board. 

15 Energy efficiency was also identified as a sector for consideration 

in the context of cooperative sectoral approaches and 

sector-specific actions (FCCC/AWGLCA/2008/11). 

Box 1: 

What it Really Takes: “Motor- 

Fuelled” Efficiency Power Plant 

Making energy services more widely available by maximizing 

the efficiency of energy supply and end-use 

– an equivalent and preferable (or complementary) 

approach to building new power plants – will require 

investment decisions to shift from generators and 

utilities to the level of the end-user. Taking a typical 

“efficiency power plant” (EPP) fuelled by industrial 

electric motor system efficiency improvements as an 

example, the following rough calculations illustrate the 

scale of the endeavour: 

• Efficiency Power Plant capacity: 300 MWe 

• Potential efficiency improvement of motor 

system: 30% 

• Number of motor systems of 25 kWh each: 

40,000 

• Implementation examples: 

– tens of large factories 

– hundreds of municipal wastewater 

treatment plants 

– thousands of small factories 

This requires a scale of mobilization that is unprecedented, 

but the related workforce development, 

financial engineering and regulatory and incentive 

framework challenges must be tackled, or energy efficiency 

opportunities with low or negative marginal 

abatement costs will not be realized. 

• Giving priority to energy efficiency in the 

shared vision for long-term cooperative 

action. 

• Launching a process to develop methodological 

guidance on the quantification and 

reporting of energy savings and greenhouse 

gas emission reductions resulting from 


135 


Box 2: 

New Vision for the CDM 

in a Broader Policy Context 

• Regard the CDM as one source of investment or revenue to transform 

markets (and the carbon market more generally, as a means of 

delivering proper price signals), not a silver bullet. The Copenhagen 

agreement must include complementary means to remove barriers to 

end-use efficiency and market transformation. 

• Acknowledge that the rules for the CDM as currently applied do 

not work for many types of very desirable end-use energy efficiency 

projects and programmes. Hence changes need to be made regarding 

additionality, methodologies and Programmes of Activities (PoAs). 

• Recognize that simple, robust and conservative methodological 

approaches to the quantification of energy savings and emission 

reductions from end-use efficiency efforts can ensure “real, 

measurable and long-term benefits related to the mitigation of climate 

change”. Such mitigation benefits would be greater than what is 

achieved under the current framework, with its emphasis on accuracy, 

precision and attribution at the expense of implementation. 

• Consider “free riders” as “early adopters” to be rewarded in the 

long-term effort to stimulate climate mitigation and encourage the 

maximization of market transformation, consistent with the two 

objectives of the CDM. 

• Encourage developing country Parties to establish realistic, yet 

aggressive goals for CDM financing of poverty alleviation strategies, 

which would facilitate climate mainstreaming in development 

strategies and inform buyers/investors of country priorities. 

• Mobilize concessional resources to support capacity-building, 

methodology development and business model development, e.g. 

training for potential PoA managing entities. 

• Create a qualified industry regulator made up of full-time staff (not 

acting as country or regional representatives) with a clear mandate 

and budget that will allow the body to deal with issues independently 

and on an ongoing basis. 

• Re-define the role of the CDM regulator to take more of a top-down 

approach to energy efficiency CDM evaluation by drawing on the 

vast expertise within the energy efficiency community and market 

participants engaging in commercial activity. 

policies, standards, codes, programmes, 

initiatives and projects, with special attention 

to energy efficiency. 

• Ensuring that energy efficiency becomes 

one of the key action areas for climate 

change mitigation by both developed and 

developing country Parties. This might include 

provisions related to: 

o Requirements to adopt National 

Energy Efficiency Action Plans and/ 

or to undertake enhanced reporting 

on energy efficiency policies and 

measures (guidance on such plans 

and reporting would need to be 

developed). 

o Reforms to the project-based 

mechanisms of the Kyoto Protocol 

that will allow carbon finance for 

energy efficiency activities to be 

massively scaled up. 

o Mechanisms to ensure sufficient 

human, institutional and financial 

resources to raise public awareness, 

encourage behavioural change, and 

design, implement and enforce the 

necessary policies and measures in 

the context of development strategies. 

o Commitment to implement 

specific energy efficiency policy 

recommendations, such as the 

IEA Energy Efficiency Policy 

Recommendations (IEA, 2008) and 

those of the Expert Group on Energy 

Efficiency (EGEE, 2007). 

o Technical work on subjects such as 

the harmonization of energy efficiency 

testing procedures, key performance 

indicators and benchmarking for 

key sectors, stipulated savings, and 

quantification of energy savings. 

o International cooperation and 

partnerships. 

136 


New Vision for the CDM 

Despite its stated dual objective, the CDM has 

come to be regarded as a zero sum game, with a 

focus on generating CERs for Annex I compliance. 

This is unfortunate, because the CDM could 

make a real contribution to greater mitigation 

by developing countries if the emphasis were 

shifted to maximizing CDM performance with 

respect to market transformation and sustainable 

development goals. In the big picture, what 

goes on outside the project boundary in host 

countries with respect to drivers of emissions 

growth is much more important than what goes 

on inside it, yet the current CDM framework does 

not encourage positive spillovers or provide for 

the evaluation of market effects. 

One of the prime objectives of CDM reform, 

therefore, should be to strengthen the role of the 

CDM in assisting developing countries to achieve 

sustainable development and contribute to the 

ultimate objective of the Convention. This will 

require action by host countries, for example, 

to develop plans to leverage carbon finance to 

implement their development strategies 16 (Arquit 

Niederberger, 2006). The financial mechanisms 

that emerge from the Bali Roadmap will need to 

support the necessary strategic, capacity, project 

and methodological development, particularly in 

poorer countries. The elements of a new vision 

for CDM are outlined in Box 2: 

But it will also require correcting some of the 

contradictory concepts and practices that have 

crept into the CDM rulebook. The CDM Executive 

Board provided a clarification that national 

16 An innovative approach taken by China was to require that 

the proceeds from CDM be shared with the government for 

re-investment in climate change activities, with a greater share 

going to the government for non-priority project types. 

and/or sectoral host country policies to reduce 

emissions implemented after 11 November 2001 

need not be taken into account in developing 

a baseline scenario (CDM-EB, 2005). Yet the 

CDM Methodology Panel and Small-Scale 

Working Group have repeatedly required that 

proposed new end-use efficiency methodologies 

specifically account for energy efficiency 

improvement trends and free-ridership in the 

baseline. This practice is in direct contradiction 

with the Board’s clarification, which further 

specified that the baseline scenario could refer 

to a hypothetical situation without the national 

A more fundamental reason that end-use energy 

efficiency projects are not being developed under 

the CDM is that such projects face multiple 

barriers – some of which cannot be overcome 

with CER revenues or investment alone. 

and/or sectoral policies or regulations being 

in place. If the CDM is to assist developing 

countries in contributing to mitigation, then 

“early adopters” and progressive governments 

must be encouraged in the long-term effort to 

stimulate climate mitigation, not penalized. 

Treatment of leakage was mentioned above 

as another area of inconsistency. A further 

manifestation of this is that the Small-Scale 

Working Group has ruled that greenhouse gases 

as defined in Paragraph 1 of the UNFCCC, but not 

included in Annex A of the Kyoto Protocol (e.g., 

CFCs, HCFCs), must be taken into account in 

considering leakage in so far as the CDM project 

activity results in an increase in emissions of 

those gases. This would appear to contradict the 

CDM Executive Board definition of leakage, which 


137 


efers to the net change of emissions. Replacing 

outdated refrigerators and space heating and 

cooling equipment that rely on fluorinated 

gases 17 as refrigerants (and as blowing agents in 

insulation material) offers opportunities for large 

additional greenhouse gas emission reductions, 

if proper incentives can be offered for end-of-life 

refrigerant recovery. There are 1.2 to 1.5 billion 

domestic refrigerators currently in service, 

representing an estimated bank of 100,000 tons 

of CFC-12, for example, and approximately 75% 

of their service refrigerant demand continues 

to be CFC-12 (UNEP/TEAP, 2006). Montreal 

Protocol (MP)–funded activities do not address 

post-production use of MP gases. As a result, 

although suitable alternatives have been available 

since the early 1990s, CFC refrigerators continue 

to be manufactured, sold and serviced because 

end users are excluded from MP support by the 

funding criteria. Other fluorinated gases (HFCs, 

HCFCs) used as substitutes also contribute 

significantly to the greenhouse effect. Allowing 

CERs to be generated for the reduction in 

CFCs and HCFCs at end-of-life could increase 

the financial viability of one subset of small 

energy efficiency projects with relatively high 

transaction costs and also address an important 

source of greenhouse gas emissions that is not 

covered by any international agreement. This 

could be done simply by considering these gases 

in the context of net leakage. 

It will also require greater attention to CDM 

reforms that are needed to scale up carbon 

finance for end-use efficiency actions. The lists 

of possible improvements to the CDM coming 

out of the August 2008 round of climate talks 

17 Industrial fluorinated gases include hydrofluorocarbons 

(HFCs) that fall under the Kyoto Protocol Annex A and chlorofluorocarbons 

(CFCs) and hydrochlorofluorocarbons (HCFCs) 

that fall under Paragraph 1 of the UNFCCC – all of which are 

greenhouse gases. 

in Accra included 26 suggestions to enhance the 

effectiveness of the CDM and its contribution 

to sustainable development and to protecting 

the climate system. 18 Yet, not a single suggestion 

addressed the documented challenges faced 

by end-use efficiency projects under the CDM. 

Clearly, there is a disjuncture between the 

emphasis placed on energy efficiency and 

renewable energy in the context of negotiations 

on developing country mitigation actions under 

the AWG-LCA, and the related CDM reform 

discussions under the AWG-KP. 

Key CDM Reforms Needed 

for Energy Efficiency 

The Executive Board continues to explore 

approaches to create a more enabling environment 

for implementing energy efficiency project 

activities under the CDM and has requested the 

secretariat to initiate work on ways of facilitating 

the registration of energy efficiency activities 

under CDM modalities and procedures. 19 Yet two 

recent suggestions by the CDM Executive Board 

are worrisome: (i) the draft CDM Validation & 

Verification Manual instructs DOEs to determine, 

in the course of project validation, “whether 

or not the project activity would have been 

undertaken without the incentive of the CDM”, 

which is quite a divergent concept from the way 

in which it is defined, namely “a CDM project 

activity is additional if anthropogenic emissions 

of greenhouse gases by sources are reduced 

below those that would have occurred in the 

absence of the registered CDM project activity”; 

and (ii) consideration of an “enhanced barrier 

test” for project activities that have a potentially 

high profitability, which could make it even 

18 FCCC/KP/AWG/2008/L.12 

19 See Annex 13 to the Report of the 41 st session of the CDM 

Executive Board for a status report. 

138 


more difficult for energy efficiency activities to 

leverage carbon finance as discussed above. 

The demonstration of additionality of end-use 

energy efficiency projects or programmes has 

been one of the main barriers to methodology 

approval and CDM registration of such projects. 

Energy efficiency projects tend to have very short 

Figure 2. Motor System Investment Decisions Facing Plant 

Owners 

Discretionary Retrofit 

payback periods, primarily as a result of reduced 

energy costs (Arquit Niederberger and Brunner, 

2007), so they cannot typically demonstrate 

additionality on the basis of financial analysis. 

New ways of addressing additionality concerns 

for energy efficiency projects are needed. To 

begin with, it is important for additionality to be 

considered from the perspective of the technology 

end-user in the decision-making context in which 

he/she is operating, not some hypothetical ideal. 

The generic choices facing a plant owner can be 

illustrated using the example of industrial electric 

motor systems (Arquit Niederberger and Brunner, 

2007): 

Planned Replacement 

…the CDM has come to be regarded as a 

zero sum game, with a focus on generating 

CERs for Annex I compliance. This is 

unfortunate, because the CDM could make 

a real contribution to greater mitigation by 

developing countries if the emphasis were 

shifted to maximizing CDM performance 

with respect to market transformation 

and sustainable development goals 

New Installation/Facility 

Source: Arquit Niederberger & Brunner (2007) 

• Discretionary retrofits can involve just 

the motor or the entire system. The 

basic choice facing an enterprise is the 

continued operation of existing motor 

(system) vs. retrofit with new equipment 

(Figure 2). The most plausible baseline 

is continued operation of the existing 

equipment, which has already been 

amorticized, since the alternative 

would result in additional investment 

costs, plant downtime, lost revenue and 

technology risks. 


139 


• Planned replacement is almost always 

only focused on the motor, core system 

or other discrete technology, as the 

entire system rarely fails all at once. 

The basic choice facing an enterprise 

at the time a motor fails is repair 

vs. replacement (Figure 2). For the 

replacement option, the basic question 

is whether the replacement motor 

should be at the standard efficiency 

level in the given market – dictated by a 

minimum energy performance standard 

or prevailing practice – or whether to 

aim for premium efficiency. Availability 

is often a limiting factor in this choice, 

since plant downtime represents a loss 

of income: if high efficiency models are 

not stocked by distributors, they are not 

an option. Similarly, it is quite common 

for production facilities to keep reserve 

motors in stock, so the baseline is 

provided by the efficiency of these 

motors. 

• New construction would normally involve 

the entire motor system. The basic 

choice facing an enterprise is to aim for 

business-as-usual (BAU) efficiency as 

opposed to a high-efficiency system in 

the design and procurement process. 

Looking at the additionality question from the 

perspective of the end-user highlights the need 

to differentiate between the discretionary retrofit, 

planned replacement and new installation 

and construction markets. Some specific 

recommendations on additionality provisions 

are the following: 20 

• Generally exempt end-use efficiency 

retrofit projects and programmes from the 

requirement to demonstrate additionality, 

as a strong argument can be made that 

retrofit projects always face additional 

cost, financial and related risk barriers, 

which the CDM (via investment or CER 

revenues) can help to overcome. 

• Under the SSC rules, it is necessary 

to demonstrate at least one barrier 

listed in Attachment A to Appendix 

B of the simplified modalities and 

procedures for small-scale CDM 

project activities. Attachment A should 

be expanded to include specific 

provisions for end-use efficiency 

projects, such as the following proposal: 

“It is recognized that barriers to enduse 

energy efficiency are significant and 

pervasive. Therefore, end-use efficiency 

project activities that represent discretionary 

retrofits to functioning equipment or systems 

are considered a priori to be additional. With 

respect to planned replacements (at the time 

of equipment failure) and new installations, 

the investment barrier can include a higher 

up-front purchase price, even if the project 

activity would represent a financially more 

viable alternative to the baseline when 

accounting for savings in energy costs over 

the lifetime of the project.” 

• The CDM Executive Board should prepare 

with expert input a dedicated tool to 

demonstrate the additionality of enduse 

efficiency projects or programmes 

using barrier analysis for integration 

into large-scale methodologies. This tool 

would have to adopt the basic premise 

that barriers to end-use efficiency exist, 

as is well documented and evidenced 

by the fact that investments in end-use 

efficiency are not being made, despite 

20 Refer also to submissions at http://cdm.unfccc.int/public_inputs/2008/cers_rev/index.html 

140 


their short payback periods. 21 Such a tool 

might include the following elements: 

o Checklist of relevant, generic 

barriers to end-use energy 

efficiency. The Checklist 

should include a description 

or justification of each barrier, 

drawing on the extensive 

documentation available in the 

published literature. This would 

mean that common barriers would 

be well-documented or justified 

once from the top down and that 

each project would then only need 

to provide evidence that a barrier 

selected from the Checklist applies 

in the specific project context 

(without having to justify each 

time that the barrier is real, which 

is a large source of inefficiency 

and inconsistency in the current 

framework). 

o Top-down pre-determination of 

additionality, based on barrier 

analysis, for important large-scale 

energy-efficiency programme types 

(e.g., utility DSM programmes, 

ESCO or leasing schemes, energy 

efficiency financing facilities, 

government procurement and 

municipal infrastructure investment 

programes, rebate and financial 

incentive programmes, incentives 

under voluntary agreements) 

or specific guidance on how to 

demonstrate the barriers for 

such programmes. Some initial 

considerations regarding how 

to demonstrate the additionality 

of utility DSM programmes have 

already been drawn up (Arquit 

The CDM Executive Board should prepare with 

expert input a dedicated tool to demonstrate 

the additionality of end-use efficiency projects 

or programmes using barrier analysis for 

integration into large-scale methodologies. This 

tool would have to adopt the basic premise 

that barriers to end-use efficiency exist, as is 

well documented and evidenced by the fact that 

investments in end-use efficiency are not being 

made, despite their short payback periods 

o 

Niederberger and Fry, 2007). 

Specific documentation 

requirements for barrier analysis 

of other project types that can 

be met without new analysis 

(e.g., documentation of the use 

of government or GEF funds to 

provide incentives for such types 

of projects or programmes in order 

to indicate additionality; market 

research demonstrating that the 

project technology has a higher upfront 

capital cost than the baseline 

technology; official documents 

showing that the technology to 

be used in the project activity is 

more efficient than a mandatory 

standard, voluntary label or other 

widely used benchmark level in 

order to demonstrate additionality). 

21 New results from government-funded audits in hundreds of US 

industrial installations have uncovered large energy-saving potential, with 

the vast majority having payback periods of less than two years: www. 

eere.energy.gov/industry/saveenergynow/partners/results.cfm 

Besides the challenge of demonstrating 

additionality, the greatest barrier to mobilizing 


141 


carbon finance for end-use efficiency under 

the CDM has been a lack of viable approved 

methodologies for quantifying energy savings 

and emission reductions, as discussed above. 

Reform suggestions that draw on experience 

with end-use energy efficiency promotion efforts 

worldwide address: (i) the role of the CDM 

Executive Board; (ii) the interpretation of key 

CDM concepts; and (iii) the new methodology 

development process. 

The role of the Executive Board as a regulator 

of the CDM is crucial. Yet the Board’s role in 

providing top-down evaluation guidance is not 

well defined. In the case of small-scale projects, 

the Board issued an initial series of simplified 

methodologies for use and has added new 

methodologies over time, based on suggestions 

from external stakeholders. In the case of 

large-scale methodologies, the Board offers 

consolidated methodologies based on individual 

methodologies developed by stakeholders, 

but does not offer new methodologies itself. 

Table 3. Description of Selected California Evaluation Protocols 

Protocol 

Description 

Impact 

Evaluation – 

Direct and 

Indirect 

Market Effects 

Evaluation 

Codes and 

Standards 

Program 

Evaluation 

Measurement 

and Verification 

Sampling and 

Uncertainty 

Effective Useful 

Life 

Minimum allowable methods to meet a specified level of rigour that will be used to measure 

and document the programme or programme component impacts achieved as a result of 

implementing energy efficiency programmes and programme portfolios. Impact evaluations 

estimate net changes in electricity usage, electricity demand, therm usage and/or behavioural 

impacts that are expected to produce changes in energy use and demand. Impact evaluations 

are limited to addressing the direct or indirect energy impacts of the programme on 

participants, including participant spill-over impacts. 

Guidance on evaluations conducted to document the various market changes that affect the 

way energy is used within a market and to estimate the energy and demand savings associated 

with those changes that are induced by sets of programme or portfolio interventions in a 

market. 

Designed to guide evaluation approaches to meet the specific needs for codes and standards 

programmes, including net energy impacts associated with a code or standard change. 

Requirements for field measurements and data collection to support impact evaluations, 

updates to ex-ante measure savings estimates (deemed) and process evaluations. Note that 

not every evaluation study requires M&V. 

Approaches for selecting samples and conducting research design and analysis in order to 

identify, mitigate and minimize bias in support of the Protocols identified above. 

Approaches for establishing the effective useful life of programme measures (including 

evaluation of measure retention and technical degradation of measure performance). 

Source: CPUC (2006) 

142 


The Board also issues piecemeal guidance 

on individual topics, but has never issued a 

comprehensive evaluation protocol that would 

provide guidance to project participants, DOEs, 

their own panels and UNFCCC secretariat staff. 

Particularly in the field of energy efficiency, there is 

a wealth of information to draw on in establishing 

such evaluation frameworks (Arquit Niederberger, 

2007). The California Public Utility Commission, 

for example, has issued the “California Energy 

Efficiency Evaluation Protocols” (CPUC, 2006), 

which includes separate detailed protocols that could 

inform the CDM regulatory framework (Table 3). 

Relying on such protocols as a starting point 

also offers some suggestions for how to realize 

the new CDM vision presented above. Adopting 

and/or updating building codes and minimum 

energy performance standards, for example, is 

one important action that developing countries 

can take to contribute to the ultimate objective 

of the Convention, yet the CDM Executive Board 

has ruled that such regulatory efforts are not 

eligible under the CDM. In contrast, the CPUC 

Codes & Standards Protocol offers a methodology 

to estimate gross and net energy savings for both 

(i) programmes that change or contribute to a 

change in building codes or appliance standards 

that are expected to result in energy savings, and 

(ii) programmes that are implemented to increase 

the level of compliance with code requirements. 

Similarly, the COP/MOP or CDM Executive 

Board could decide to undertake market 

impacts analyses periodically to investigate 

whether the CDM is only a zero sum game, 

making Annex I compliance more costeffective, 

or whether CDM project activities 

are driving broader market transformation 

impacts in host countries that cannot be 

evaluated at the level of an individual project. 

These protocols also address various crosscutting 

issues that are particularly pertinent to 

end-use efficiency efforts (e.g., measurement and 

verification requirements; determination of free 

ridership and positive spillovers; determination 

of standard values for parameters such as effective 

useful life, deemed energy savings and net-to-gross 

of free ridership values) in a consistent, top-down 

fashion, which is sorely lacking under the CDM. 

However, it is clear that striving to adopt such an 

evaluation framework will necessitate changes in 

the division of labour between the Parties to the 

Kyoto Protocol, the CDM Executive Board (and its 

panels), the DOEs, and the project participants. 

Another advantage of adopting a more “topdown” 

approach would be greater coherence in 

the interpretation of key CDM concepts (e.g., 

additionality, leakage, treatment of poli cies and 

measures in the baseline scenario) by the various 

entities active in the carbon mar ket, including 

the panels and working groups appointed by the 

Executive Board. 

Finally, it is necessary to consider the best 

way forward in developing new quantification 

methodologies for end-use efficiency projects. The 

results of the vast efforts that have been invested 

in methodology development are meagre, with 

only a total of eighteen energy-demand (sectoral 

scope 3) projects having been registered to date 

(Table 2). The majority of the approved energydemand 

methodologies have never been used, 

and the small-scale Type II end-use efficiency 

methodologies have prove difficult to apply in 

practice, as they provide too little guidance. It is 

time to take stock and conclude that the bottom up 

approach has not worked – and is not desirable – 

for end-use energy efficiency, and that a common 

methodological framework for energy efficiency 

quantification is needed. The development of 


143 


such a framework should draw on the vast expertise 

within the energy efficiency community, for 

example, by adopting energy savings quantification 

“good practice” as codified in existing protocols, 

adapted as necessary to meet the requirements of 

the CDM. This should be treated as a priority of 

the CDM Executive Board, but coordinated with 

the broader effort of developing methodological 

guidance on quantification and reporting on the 

effects of measures, which is currently negotiated 

under the AWG-LCA. COP14 should initiate the 

process of developing consistent guidance. 

The desire to monitor, quantify and attribute the 

impacts of individual CDM projects precisely 

and accurately will be increasingly futile, given 

the range of regulatory, institutional, technology, 

financial and capacity development efforts that 

will be required. This is particularly true in the 

context of climate mitigation, which must deliver 

transforma tional emission cuts globally within 

decades. The CDM should be regarded as a risk/ 

reward incentive mechanism to stimulate greater 

investment in climate mitigation and sustainable 

development, not as an accounting tool for 

perfect offsetting. 

Conclusion 

The Clean Development Mechanism has proved 

ineffective in stimulating investment in end-use 

energy efficiency. This will come as no surprise to 

energy efficiency practitioners, who understand 

that large-scale market transformation requires 

a multi-pronged approach, but it is nonetheless 

a disappointment to many developing countries 

that could benefit greatly from CDM funding 

for large-scale energy efficiency programs to 

distribute efficient end-use equipment, for 

example, or implement green building codes and 

minimum energy-performance standards. 

Dr Anne Arquit Niederberger has extensive experience in the 

field of climate change research, energy policy, capacity building 

and strategic consulting, with a current emphasis on China. She has 

special expertise on end-use efficiency under the CDM, and is a 

founding director of Policy Solutions, an independent consultancy. 

Contact: policy.solutions@comcast.net 

Fortunately, the Bali Roadmap process presents us 

with a brief window of opportunity to ensure that 

the climate deal to be brokered in Copenhagen 

in December 2009 provides the foundation for a 

global energy-efficiency offensive, with the CDM 

as one tool. But there is a lot of work to be done 

to anchor the vision presented in this paper in the 

post-2012 framework. 

For the CDM to achieve its dual mitigation 

and sustainable development objectives, the 

Parties can no longer be satisfied with perfect 

environmental integrity of a zero-sum CDM at 

the expense of real action on end-use efficiency. 

144 


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145 


146 


Murray Ward 

Principal of the Global 

Climate Change Consultancy 

Sector No-Lose Targets: 

A New Scaling Up Mechanism 

For Developing Countries 

Abstract 

Sector no-lose targets (SNLTs) are a promising 

new carbon-market mechanism for scaling up 

investment in low-carbon technology in developing 

countries. A key characteristic of SNLTs is that, 

because they would be negotiated as part of the 

multilateral agreement along with industrialised 

countries’ targets, the concept of additionality 

would not apply, nor would any of the institutional 

processes of the CDM. Countries would need 

to have well-developed national monitoring, 

reporting and verification (MRV) and systems at 

the sector level. SNLTs are not a scaling up silver 

bullet, but they have some characteristics which 

suggest that, for some sectors in key developing 

countries where large investments are expected 

in the coming decades, they may be the best new 

carbon-finance mechanism identified thus far. 

Whether expressed in gigatonnes of needed 

emission reductions or tens to hundreds of 

gigadollars of needed investment in climate 

change mitigation activities worldwide, the 

case for “scaling up” has been made by world 

scientific, political and business leaders. The 

task of policy-makers working on the next post- 

2012 multilateral agreement is to respond to this 

challenge and consider seriously every policy 

instrument that may need to be part of the toolkit 

to give the global community a reasonable chance 

of success. Just making tuning adjustments to the 

instruments we have now is not nearly enough. 

Sector no-lose targets (SNLTs) for developing 

countries is one such new mechanism. It is a 

crediting mechanism that can be applied at 

the sectoral level, at least for some sectors and 

countries. It has the potential to make it much 

easier to mobilise the necessary inward investment 

and also to help strike a balance between the 

interests of developed and industrialised country 

parties to such investment. 

147 


However, SNLTs come with some unique 

challenges, for example: data needs to establish 

sector baselines at a national level; MRV capacity 

needs; understanding the effects on international 

competitiveness; institutional process and timing 

issues; and ensuring carbon market engagement 

and momentum. Overcoming even the initial 

set of these will require very substantial and 

deliberate capacity-building and international 

diplomacy efforts if countries are ever to be 

prepared to reach such agreements in the post- 

2012 multilateral package. 

These issues and challenges are set out and 

discussed below. This is done with a view to 

giving negotiators a sense of priority next steps 

to programme into work streams leading to 

Copenhagen. 

Background 

This new proposed mechanism of SNLTs can be 

seen to have emerged from two different strands of 

policy work. The first is the exploration in various 

forums of new potential types of enhanced policy 

tools that might be applicable for developing 

countries in a post-2012 agreement. 

In particular, the Future Actions Dialogue run by 

the Centre for Clean Air Policy (CCAP) since 

2003 came to a view after a few years that 

sectoral mechanisms held out the greatest 

promise, especially if they were framed in 

intensity terms. This is because economy-wide 

targets, even intensity-based ones, seem to go 

beyond the realms of reasonable expectation 

in this next phase of global climate change 

agreements. Moreover, economy-wide targets 

can have practical structural difficulties such 

as the double pain problem, where targets are 

expressed in emissions per GDP. 1 But intensitybased 

sectoral mechanisms would not suffer this 

problem. 

In addition to the CCAP work, there has been 

considerable analytical effort done on sectoral 

crediting mechanisms by the Annex I Experts 

Group, supported by its secretariat experts at 

the OECD and the International Energy Agency 

(IEA) (e.g. see Baron et al., 2007; Baron and Ellis, 

2006; Ellis and Baron, 2005). 

The second strand has come out of the high-level 

work on scaling up investments in low-carbon 

technologies, which has mostly been led by the 

G8 Gleneagles Dialogue process, also involving 

the World Bank and IEA. Recent papers for UK 

DEFRA (Ward et al., 2008) and the World Bank 

Carbon Finance Unit (Ward, Garibaldi et al., 

2008) pull these two strands together, as well as 

placing SNLTs in the broader context of other 

scaling up mechanisms, such as programmatic 

and sectoral CDM, and other sectoral policy 

approaches for developing countries, such as SD 

PAMs. 

Papers (Colombier and Guerin, 2008 and Ward, 

2008) from the recent Tony Blair and Climate 

Group Breaking the Climate Deadlock initiative 

have also sought to place sectoral crediting 

mechanisms such as SNLTs within the broader 

spectrum of sectoral approaches, including sectoral 

agreements that can bridge industrialised and 


This paper draws on this earlier body of work and 

seeks to summarise and distil some key messages 

about SNLTs in particular. 

1 Here, countries could find themselves struggling to meet targets 

if their GDP fell (e.g. for macroeconomic and global commodity price 

reasons) without a commensurate drop in domestic emissions. 

148 


The SNLT policy tool 

SNLTs are a form of non-binding emission target 

that could encourage sector-wide emission 

reductions. Developing countries could 

voluntarily propose a sector crediting baseline 

which would be negotiated at the international 

level, most likely in terms of the national 

emissions intensity of the sector in question over 

a commitment or management period of time. 

Reductions below the baseline generate credits 

issued to the government, but no penalties would 

occur (hence “no lose”) if the target is not met for 

the whole sector. See Figure 1. 

What is depicted in Figure 1 could also describe 

what has been called “sectoral CDM” where some 

form of baseline is established for a sector e.g. a 

multi-project baseline or benchmark and credits 

are awarded for beating this baseline. The main 

difference between sectoral CDM and SNLTs 

is that the technicalities referring to baselines, 

monitoring and verification, as well as supervision 

and approval by the CDM Executive Board, would 

be maintained under sectoral CDM. Proponents 

of the SNLT mechanism propose that the national 

sector baseline for a SNLT would instead be 

negotiated at the COP level. This would be done 

as part of the same negotiating process in which 

Annex I country targets for post-2012 are being 

agreed, so additionality would no longer be an 

issue, any more than it is for actions taken by 

Annex I countries that have targets. 

This additionality distinction between SNLTs and 

any form of CDM is what distinguishes this policy 

Figure 1: Simple depiction of a sectoral crediting baseline 

Source Ecofys/GtripleC (2006) 

A New Scaling Up Mechanism For Developing Countries 

149 


tool in particular, suggesting that it might have the 

greatest potential for scaling up investments, at 

least in appropriate sectors. The single main reason 

for constraints in the CDM is the institutional 

decision-making processes associated with additionality 

and environmental integrity. 

As noted above, the idea for SNLTs stems from 

discussions occurring as far back as 2003 in the 

CCAP Future Actions Dialogue. Two variants of this 

idea have now emerged, largely independently 

of each other. Of the two, the CCAP approach 

(see Schmidt et al, 2006) can be seen as a more 

prescriptive version and one with elements 

that are specifically intended to address international 

competitiveness concerns. The CCAP 

approach would focus on the ten largest 

developing-country emitters for each of the 

major sectors proposed e.g. electricity, iron and 

steel, chemical and petrochemical, aluminium, 

cement and limestone, paper pulp and printing. 

A technology and financing package would 

be provided to these countries to offset the 

costs of their involvement. These costs stem 

from the requirement for crediting baselines 

to incorporate a non-crediting element that 

represents these countries’ contribution to 

the atmosphere. The competitiveness-focused 

elements relate to the use of pre-set benchmarks 

established by third-party independent-expert 

bodies. These benchmarks provide the starting 

point for negotiations with developing countries 

on what their specific crediting baselines should 

be. The benchmarks are also intended to guide 

allocations for industries in these sectors 

operating in the EU ETS, and presumably other 

industrialised countries as well. 

The other variant of the SNLT idea, developed 

by GtripleC and Ecofys, has centred on the 

development of sectoral proposal templates (see 

www.sectoral.org). The purpose of these templates 

– which could be used by any developing country 

seeking to propose such a target voluntarily 

as part of the post-2012 negotiations – is to 

provide a standardised tool by which countries 

can draw up and propose crediting baselines. 

These templates are initially seen as a capacitybuilding 

tool for countries to use internally. In 

turn, they become a negotiation facilitation tool 

to help the process of negotiations by providing 

some level of standardisation of information, 

presentation and transparency. The templates 

include details of best practice as this exists in 

other countries, not with a view to these being 

seen as benchmarks and used as the basis for 

negotiations. And instead of the notion of having 

a negotiated technology and finance package, the 

templates describe what internationally provided 

support countries may be receiving in a given 

sector (or might receive in the future) that can 

allow them to achieve lower emissions separate 

from the support of carbon finance. 

These summary differences aside, both concepts 

share the characteristics of voluntarily proposed 

targets being intended for developing countries. 

The metric for these targets will most likely be set 

in intensity terms, e.g. tonnes CO 2 

per tonne of 

cement or per MWh electricity. This distinguishes 

these concepts from so-called ‘transnational 

sectoral targets’, i.e. industry sectoral targets, 

where the aim would be targets (or benchmarks) 

for industries operating in both industrialised 

and developing countries. 

While the CCAP proposal does have an element 

of this competitiveness-focused thinking in its 

use of international benchmarks, as it applies 

to developing countries, it is clearly in the same 

family of ideas as the GtripleC/Ecofys variant. In 

particular, where this paper focuses on domestic 

implementation issues, these should generally 

apply to either variant of the concept. 

150 


SNLT candidate sectors 

It can be expected that developing countries may 

be stimulated to consider SNLTs in sectors for 

which they seek significantly scaled-up privatesector 

investment according to their sustainable 

development priorities, and where current 

carbon-market policy tools, such as the various 

forms of CDM, are not considered adequate to 

the task. 

However, SNLTs are unlikely to be feasible for 

all key sectors, and even for those sectors where 

they may be feasible, this may not be true in 

all developing countries. Like all credit-based 

mechanisms, it is necessary with SNLTs to 

establish a baseline, and then measure, report 

and verify performance against this. 

The metric of this baseline, then, must be 

something that is measurable in practice and 

where a measured change is representative 

of either reduced tonnes of emissions to the 

atmosphere, or enhanced sequestration. This 

becomes increasingly challenging as one moves 

away from project-scale CDM projects towards 

something at the sector level. Moreover, given 

that the the SNLT tool is used in developing 

countries, the performance metric is typically 

framed in intensity 2 terms to ensure that it does 

not operate as a cap on development. Having 

intensity baselines also means the need for the 

parameter that is the denominator in the metric 

to be measurable and, in turn, measured, reported 

and verified. 

Some examples of possible sectors and baseline 

metrics are: 

2 At the end of a given management period, when the performance of 

the denominator parameter is known, intensity targets can be converted 

into absolute tonnes and compared with tonnes of emissions, thus enabling 

credits to be issued in ‘tonnes’. 

• electricity generation: tonnes CO e per 2 

MWh generated. Note also that this would 

represent tonnes of emissions emitted 

into the atmosphere, so reductions 

from carbon capture and storage (CCS) 

would be picked up under this metric. It 

might also be feasible to do a separate 

sector baseline for resultant emissions 

associated with electricity losses in 

transmission and distribution systems. 

Sectoral no-lose targets (SNLTs) are 

particularly appropriate for rapidly 

industrialising (or developing) countries 

where there is a need for significant capital 

investment, and where investments are 

otherwise likely to follow historical high-carbon 

patterns typical of industrialised countries. 

• cement, aluminium or steel production: 

tonnes CO 2 

e per tonne produced. Some 

similar industrial commodities may also 

be feasible, e.g. bricks, pulp and paper, 

some chemicals, including refined oil 

products, and some mining and mineral 

processing. 

• upstream emissions of oil and gas production 

(e.g. gas flaring): tonnes CO 2 

e 

per barrel of oil delivered to refineries 

or export facilities, or volume of gas 

delivered. 

Notably, most of these examples are industrial 

in nature and probably reflect smaller numbers 

of large sources. By comparison, sectors such 

as buildings and transport have large numbers 

of small sources. A SNLT approach here is 


151 


much more complex and perhaps not feasible – 

although it may be possible to define some subsectors, 

including perhaps regions of sub-sectors 

that are sub-national in scale. 

SNLT candidate countries 

As discussed above, the CCAP variant of SNLTs 

proposes a focus on the top ten emitters among 

developing countries for given key sectors. In 

contrast, the Ecofys/GtripleC approach takes 

the perspective that SNLTs should be open to any 

developing country that wishes to propose SNLTs 

voluntarily and that can develop the requisite 

measurement, reporting and verification (MRV) 

national systems capacities. 

More generally, the key issue is scaling up the 

investment in low-carbon technology in key 

investments, especially in new infrastructure 

investments, but also in upgrades of existing 

capital stock. This suggests that SNLTs are 

particularly appropriate for rapidly industrialising 

(or developing) countries where there is a need 

for significant capital investment, and where 

investments are otherwise likely to follow historical 

high-carbon patterns typical of industrialised 

countries. The Energy Investments Outlook work 

of the IEA provides a useful information base 

that describes in which countries such major 

investments in low-carbon technology are likely to 

be needed. 

In some cases, the nature of the sector provides 

insights into which countries might benefit most. 

So, for example, an SNLT for upstream oil and 

gas processing focusing especially on gas flaring 

may be particularly relevant to countries such 

as Indonesia and Nigeria. Similarly, an SNLT for 

electricity transmission and distribution may be 

particularly relevant to India. 

Finally, there is a big picture politics to this. 

Section 9 below takes up the issue of the need of 

a demand for the scaled up supply of credits that 

SNLTs imply. This demand will only come from 

the much deeper absolute and economy-wide 

emission-reduction targets that are expected 

of industrialised countries in the post-2012 

agreement. However, for these countries to take 

on and ratify such targets, it is likely that there 

is a strong domestic political need for major 

developing countries to take on targets of some 

type too, especially in some key sectors such as 

electricity generation. 

Fit with other policy tools 

SNLTs can be seen as one of a menu of possible 

international policy tools for developing 

countries that provide some kind of incentive. As 

noted above, SNLTs are seen as being potentially 

applicable to some key sectors in some developing 

countries. Other carbon-finance policy tools 

include the family of possible variants of the 

CDM mechanism (standard project-based, 

programmatic, policy-based, sectoral). Noncarbon 

finance policies include, for example, SD- 

PAMs and specific sectoral agreements, with for 

both of these some form of technology and/or 

financial support. 

In general, if a country implements an SNLT in 

a given sector, this sector is no longer eligible 

for new CDM activities, as this would potentially 

lead to double crediting. However, a form of JIlike 

mechanism could be employed domestically 

to nest project-based carbon financing within 

such a sector. This is taken up below in section 

8. 

Conceptually, there is no problem in having a 

mix of an SNLT and SD-PAMs and other forms 

of non-carbon finance policies occurring in the 

152 


same sector. These other policies can be seen as 

being part of the discussions about the baseline 

beyond which carbon finance under an SNLT 

applies. This is depicted below in Figure 2 in 

section 7. 

Major steps to include SNLTs in 

the post-2012 agreement 

High-level issues 

A series of steps are needed at both the national 

level of interested developing countries and the 

international intergovernmental level. In the 

interests of time, and given that this new policy 

tool is being proposed as potentially a key new 

mechanism in the post-2012 period, it will be 

important that the national and international 

steps proceed in parallel – and expeditiously! 

It is important not to impose a set of expectations 

on developing countries beyond what is 

expected of industrialised countries, especially 

where infringements on sovereign rights and 

responsibilities may be perceived. SNLTs need 

to be seen in the context of targets voluntarily 

taken on in a multilateral negotiation process, as 

distinct from baselines of the CDM type. To this 

extent, SNLTs are not unlike the targets that will 

be taken on by industrialised countries, although 

there are some key technical differences. 3 But in 

both cases, the beating of a target has the result 

of creating tradable emission units called credits 

in the case of SNLTs, and Assigned Amount Units 

(AAUs) in the case of industrialised country 

targets. In either case, for example, excessively 

soft targets have the potential to be a source 

of excessive supply to the carbon market and 

undermine its effectiveness for all countries. 

3 In particular, SNLTs are expected to be defined in intensity terms, 

meaning that credits are issued ex-post following verified performance 

over a given period. 

Any differences in the treatment of prospective 

targets for industrialised countries and SNLTs 

for developing countries therefore need to be 

grounded in an objective realisation of facts. 

A key issue here is the different capacities 

and capabilities relating to MRV systems. 

Industrialised countries have had nearly ten 

years to prepare for the Kyoto Protocol’s first 

commitment period, whereas for developing 

countries MRV has mostly just been focused 

at the project level, when CDM activities were 

undertaken. 

One issue that seems to need the serious 

and immediate attention of the international 

community is how the post-2012 negotiations 

are going to cope with the need for objective and 

accurate data and analysis of countries’ national 

circumstances, including proposals that are 

transparent and accessible to all key players in 

the negotiations. Significant targeted capacitybuilding 

is likely to be needed. 

A key characteristic of SNLTs is that, 

because they would be negotiated as part 

of the multilateral agreement along with 

industrialised countries’ targets, the concept 

of additionality would not apply, nor would 

any of the institutional processes of the CDM. 

Under the CDM, the Conference of the Parties 

(COP) delegated the responsibility for accepting 

baselines to the CDM Executive Board (EB). 

In turn, the EB relies heavily on the technical 

expertise it can draw on from its various panels and 

working groups. Also, the accredited designated 

operational entities (DOEs) have a critical role 

to play in the overall quality assurance of EB 


153 


decisions about baselines. Another key point is 

that, in the CDM, possible errors in judgement 

are contained at the project scale. 

Agreeing SNLT baselines at the COP level is 

a much more significant step. This raises key 

institutional questions with respect to the 

process of how Parties reach the necessary level 

of confidence in their understanding of the 

consequences of their impending decisions to 

be able to reach final agreements. It seems that 

there is a need for an objective technical advisory 

group to assist the negotiation process of SNLTs, 

and perhaps even of industrialised countries’ 

targets. Its advice should be transparent and 

available to all Parties. 

The COP may also see the value of establishing 

some kind of executive board or group to 

manage this technical process and bring 

recommendations to the COP. In some ways, 

such an executive group would play a similar role 

to the CDM EB. However, this group would have 

a purpose-specific and time-limited function. 

And on the issue of time, it would need to be 

established very quickly and efficiently, e.g. in 

the first half of 2009. Unfortunately, the history 

of the UNFCCC being able to create such an 

institutional group very quickly and efficiently 

does not inspire much confidence. But the 

UNFCCC process itself needs to be ready to 

up its game in order to manage the challenges 

presented by the post-2012 negotiations. 

National level steps 

A first step to generate national interest and 

begin the preparation of information and data is 

to raise awareness of the existence of the SNLTs 

policy tool at the national level. This should 

be done at various levels of the government, 

and also within the industry in a given sector 

(or sectors) of a given country that might be 

suitable for this approach. Initiatives have to 

be taken to inform stakeholders by, for example, 

organising workshops around the subject so that 

institutions can take ownership of the technical 

exercises that will come. 

Once the basics of the approach have been 

understood, it will become clearer whether general 

interest exists and an initial understanding of the 

capacities in a given country can be acquired. 

In thinking about their scaling-up priorities, 

developing countries will need to decide which 

sectors or technologies are most effectively 

addressed by a SNLT, and which sectors might 

be more effectively dealt with by, for example, 

programmatic CDM or other funding mechanisms. 

These are issues which, by their nature, fit well 

under the concept of developing countries taking 

a strategic programme approach to securing lowcarbon 

investment. 

Within this initial familiarisation process, an 

assessment should be made of which sectors in 

a given country might be relevant for SNLTs. As 

noted in section 4, a key consideration is likely to 

be sectors that have large and growing emissions, 

where there is a need for significant investment 

in low-carbon technologies and where such 

decisions have significant long-term emission 

consequences. These investments might be 

either for the modernisation of existing or for 

new infrastructure and plant. It is also likely to 

depend on the maturity of the sector, which in 

turn depends on data availability and capacities, 

among other factors. 

For given sectors, countries then need to begin 

the process of determining what an appropriate 

baseline might be for the SNLT. Ecofys/GtripleC’s 

work on sectoral proposal templates, noted in 

section 3, is specifically intended to help at this 

stage. The templates assist a country to prepare 

154 


Figure 2: Development of SNLTs 

Source: Ward et al, 2008 

and, in turn, tell its story in terms of the potential 

for improvements in GHG intensity for the given 

sector, following the steps depicted below in 

Figure 2. 

The in-country efforts described above in this 

section involve a significant commitment of 

resources and time. A financing package is likely 

to be needed for many developing countries to 

undertake the necessary in-county work to get 

them to the point of being ready to present 

proposals for SNLTs in the negotiations of the 

multilateral post-2012 climate agreement. 

Issues arising for the negotiation process 

Multilateral negotiations by their nature reflect 

the interests of all countries, both in broad 

groups and individually. Negotiations under 

the UNFCCC in particular also reflect a general 

consensus-based process. Taking up a new 

mechanism such as SNLTs therefore requires a 

general consensus that this is useful to achieving 

an overall agreement. 

The key feature of SNLTs is that they move 

beyond the institutional constraints that will 

exist for any carbon market mechanism where 

additionality is a core requirement. Moreover, for 

such sectors and countries, it shifts the focus of 

climate-change mitigation to a sector level and 

requires management across whole sectors, not 

just individual projects or activities. 

The potential benefit of scaled-up, carbon marketfinanced 

investment for developing countries 

seems clear. A crucial question is whether 

industrialised countries feel that the increased 

scope for least-cost mitigation, plus mitigation 

management at the sector level by developing 

countries, provides what they are expecting of 

such sectors in developing countries in the post- 

2012 regime. 

A key underlying issue here is the international 

competitiveness of emissions-intensive sectors in 

industrialised countries – specifically carbon 

leakage. Between industrialised countries this 


155 


concern mostly is displayed through an expectation 

that all industrialised countries will take fixed and 

binding economy-wide targets. The debate is, 

then, how stringent the reduction targets of 

individual countries should be. Of course, within 

industrialised countries there will be domestic 

policy debates about how such national targets 

are then distributed among specific sectors, 

especially those perceived to be internationally 

competitiveness-at-risk. But this is largely a 

domestic policy matter that need not be addressed 

by the international community. 

With respect to SNLTs for developing countries, 

the form the competitiveness issue takes is 

different. It becomes a question of whether 

industrialised countries, under pressure from 

their domestic industry constituencies, have 

specific technical requirements for such SNLTs. 

These, for example, may indicate an expectation 

that some sectors in some countries should 

be covered in such a regime, or that certain 

technical benchmarks should be applied in the 

determination of appropriate baselines. This 

can be seen as lying behind the CCAP sectors 

and top ten-country proposals and their use of 

agreed international benchmarks as the starting 

point for the negotiation of SNLTs. 

It is clear that there is traction in some emissionsintensive 

industry sectors in industrialised 

countries that such competitiveness concerns 

should be given serious consideration in any 

formulation of a new SNLTs mechanism, or for 

that matter, in the formulation of any developing 

country commitment. Indeed, there is a view in 

some quarters that global industry agreements in 

certain competitiveness-prone sectors, such as 

cement, iron and steel and aluminium, covering 

both industrialised and developing countries 

are preferable to having these sectors covered by 

SNLTs in developing countries. What is less clear 

is whether these competitiveness concerns have 

sufficient traction with enough industrialised 

country governments for this to have an impact 

on the development of negotiation modalities 

for SNLTs. 

In addition to competitiveness concerns, there 

may be concerns about the scale of credits that 

may flow from some sectors if sectoral crediting 

were allowed. This issue concerns the potential 

mismatch of demand and supply in the carbon 

market (i.e. potentially too little demand and too 

much supply). 

If these competitiveness and potential (oversupply 

concerns become sufficiently important 

to major players in the negotiations, then the 

following type of decision might be deemed 

necessary with respect to the development and 

negotiation of proposals for SNLTs: 

• which sectors are suitable on the national 

and international level (and which are 

not), including the technical or other 

criteria by which these judgements 

might be made 

• the demarcations of the sectors in 

order to provide for international 

comparability; while for some sectors 

boundaries are relatively easy to define 

(e.g. the cement sector), this might 

be more challenging for others (e.g. 

chemical production). Spill-over effects 

have to be accounted for. 

• what data and information must be 

provided, and the nature and uniformity 

of this data (e.g. for comparability 

assessments). 

It may be desirable to collect data centrally 

156 


that is comparable across countries. These 

data could help countries that are proposing 

national sectoral baselines and other countries 

and institutions to judge the stringency of the 

proposed baselines. 

Irrespective of whether these issues become a 

necessary part of the process of negotiations 

for SNLTs, it can be expected that there will 

be requirements for a minimum level of 

sophistication and performance of MRV systems 

for any such sectors. This may have the effect of 

ruling out some sectors in some countries where 

the MRV systems are not sufficiently mature. 

Attention to MRV issues is therefore a critical 

issue in the national level development and 

testing of the SNLT mechanism. Challenges that 

might be faced in this process could include 

the availability of data from industry for reasons 

such as competitiveness concerns, especially 

confidentiality, or institutional barriers within 

the industry. Furthermore, the time frame within 

which this has to be achieved could be difficult 

to set, as the amount of data that needs to be 

gathered might differ tremendously from country 

to country, not only because of the size of each 

country’s sector, but also because of institutional 

and political barriers, which might be quite 

different across countries. 

A key point regarding the issues raised above 

is that those groups that are already working 

proactively on methodologies applicable to this 

mechanism (e.g. sectoral proposal templates) 

need to obtain some indications as soon as 

possible from the international community as to 

the likely required technical specifications for 

the information and data needed to support the 

negotiations. This will help such groups testing 

the viability of this mechanism in given countries 

and sectors in their ongoing work. 

A significant issue for the negotiations that is 

relevant to SNLTs in particular is that it cannot 

be expected that every developing country that 

may be interested in proposing SNLTs will be 

ready to do so at the time that the international 

community expects the main details of the post- 

2012 multilateral climate-change deal to be 

agreed (e.g. in late 2009). This suggests that a 

doorway mechanism of some sort needs to be part 

of the main agreement, leaving open the option 

of such SNLTs to be added to the agreement at a 

later stage. 

SNLTs can be seen as one of a menu of possible 

international policy tools for developing 

countries that provide some kind of incentive. 

More work is needed on this timing mismatch 

issue, including the issue of how subsequent 

agreement on SNLTs may affect the targets that 

have already been agreed for industrialised 

countries. The best option seems to be for 

the immediate implementation of accelerated 

capacity-building and diplomatic effort, such 

that details of potential SNLTs in some key sectors 

in some key countries can be well advanced 

by the time that industrialised countries are 

agreeing their next targets. The SNLT agreements 

could then be finalised in the period between 

industrialised countries agreeing their targets 

and the overall package of the deal being ratified 

by domestic governments. 

Given the potential importance of the SNLT 

mechanism, it will be desirable to find some early 

means to pilot test it prior to the final details of 

the mechanism being set. Countries that have 

sectors mature enough for no-lose targets could 

volunteer to participate. The World Bank’s new 


157 


Carbon Partnership Facility (CPF) provides an 

opportunity for such piloting. It is conceivable 

that pilot-phase activities could be carried 

out for some sectors at either the national or 

sub-national regional levels. A number of the 

proposed possible pilot initiatives identified by 

the World Bank for the CPF, in particular largescale 

renewable electricity generation, could be 

seen as amenable to a SNLT-type mechanism. 

Implications for domestic policy and 

private-sector carbon finance 

A key issue for developing countries with SNLTs 

is how the interest of project developers and 

carbon financiers, whose activities thus far 

under the CDM have focused at the project level 

– including, importantly, the issuance of carbon 

credits – can be maintained when crediting 

occurs at a sector level and, in the first instance, 

is directed to governments. 

SNLT has the potential to make it much easier 

to mobilise the necessary inward investment and 

also to help strike a balance between the 

interests of developed and industrialised 

country parties to such investment. 

To achieve sectoral emissions reductions, national 

governments could implement domestic policies 

and measures with direct links for entities to 

the international carbon market, e.g. schemes 

that allocate credits to emissions-reduction 

activities by entities in the relevant sector, or by 

establishing internal emissions trading schemes 

like the EU ETS; 

Governments could also implement new and 

additional domestic policies or enhance the 

enforcement of existing measures that do not rely 

on carbon finance and emissions trading. Carbon 

taxes, enhanced law enforcement, intensity 

or efficiency standards, and subsidies (either 

adding or removing subsidies as the case may 

be for a particular sector) are examples of these 

types of policies and measures. Governments 

can then sell the received credits directly on the 

international carbon markets. 

To overcome the potential problem of the 

disengagement of currently active carbon market 

players (project developers and carbon financiers) 

because of concerns about having to negotiate 

with national governments to obtain credits, a 

nesting approach could be employed whereby an 

international institutional process akin to the 

current CDM, or ‘Track 2’ JI existed and credited 

individual on-the-ground activities. The total of 

any credits issued under this process would then 

be deducted from the amount the country was 

later issued for the overall sector performance. 

If a concern arises that there may be a demand– 

supply imbalance that would harm the carbon 

market (i.e. too little demand and too much supply 

from sectoral crediting in developing countries), 

a variant of the nesting approach may be to have 

funds provided to governments for beating their 

sector targets, not carbon credits. 

Significant institutional issues regarding capacity, 

legal frameworks and public compared with 

private can arise with all domestic implementation 

models. 4 Given these institutional issues, there 

are substantial capacity-building challenges that 

need to be taken up with some urgency if SNLTs 

4 These are assessed in some detail in Ward et al., 2008. 

158 


are going to play a significant role in the next 

multilateral framework. 

Scaled-up supply needs scaled-up demand 

The case has been made in a range of studies 

for the need for the scaling-up of investments. 

Moreover, there seems to be an expectation 

that the private sector, and the carbon market 

specifically, will play a, if not the major role in 

providing this investment. But where is the 

market demand to come from? Discussions 

about enhanced mechanisms serving the supply 

side such as SNLTs will be affected if there is no 

compelling answer to this question. 

There are reasons for concern. Thus far, the 

primary demand driver of the market for CERs 

has been the EU ETS. The EU Commission’s 23 

January 2008 proposal for amendment of the 

ETS Directive does not provide any demand 

for imports from new CDM projects starting 

after 2012 in the absence of an international 

agreement. Then there is the issue of the supply 

of credits potentially coming from the renewal 

of existing CDM projects. Project activities 

registered for seven years can request renewal for 

a second and third crediting period. This means 

that current CDM projects registered for seven 

years could effectively have a 21-year life-cycle if 

renewal does not change the baseline for these 

projects. For the period 2013-2020, if there is a 

renewal of all projects beyond their first crediting 

period, there is a potential supply of CERs from 

projects that have already been implemented 

or in the pipeline of about 4.8 billion CERs 5 , 

thus significantly limiting the incentive for new 

investment. 

5 Source: J. Fenhann, UNEP Risoe. 

Summarising, then, for there to be significant new 

demand for compliance carbon commensurate 

with expectations on the supply side, in addition 

to this renewal issue needing to be addressed, 

industrialised countries (and not just the EU) will 

need to take on significant emissions-reduction 

obligations in the post-2012 climate deal. 

This demand–supply balance issue can be 

expected to lead to a growing awareness that 

mechanisms that may flood the market with large 

numbers of compliance credits may not be good 

for the overall health of the carbon market. This 

suggests that close attention will continue to be 

paid to baselines, whether these are part of CDMbased 

mechanisms or of the form of SNLTs. 

Concluding comments 

SNLTs are not a scaling-up silver bullet, but they 

have some characteristics which suggest that, 

for some sectors in key developing countries 

where very large investments are expected in 

the coming decades, they may be the best new 

carbon-finance mechanism identified thus far. 

Moreover, in conjunction with SD-PAMs, they 

may be what are needed to strike the appropriate 

political balance with respect to mitigation 

between industrialised and developing countries 

in the post-2012 agreement. To obtain a post- 

2012 agreement with ambitious reduction targets 

ratified by industrialised countries, it is likely that 

they must be able to point to significantly greater 

commitments to mitigation actions being taken 

in major developing countries than has been 

the case under the current Kyoto agreement. 

And it is these ambitious reduction targets for 

industrialised countries that create the demandside 

basis in the international carbon market for 

increased investments in low-carbon technology 

in developing countries. 


159 


However, to realise this potential, a very large effort 

is needed in a very short time. This will require 

proactive leadership in both industrialised and 

developing countries, as well as in governments 

and business. A tactical approach to the timing 

and capacity-building issues, one which may 

ease the political challenges, could be to identify 

a number of specific SNLTs in specific countries 

that focus on solving significant emission 

issues and addressing critical investment 

needs. Capacity-building and diplomacy efforts 

could then be directed in particular to these 

circumstances with a view to doing the necessary 

preparatory work in 2009. 

Some illustrative examples of such efforts could 

be SNLTs for electricity generation in China, 

Mexico, South Africa, India and Saudi Arabia; 

for cement in China, Mexico and Brazil; for iron 

and steel in China, India and South Africa; for 

gas-flaring emissions in oil and gas production 

in Indonesia, Nigeria and Saudi Arabia; and for 

electricity distribution in India. Note that South 

Korea is not listed here as it has announced its 

intention of proposing an economy-wide target 

of some form. 

References 

Baron, R. et al. (2007) Sectoral approaches to greenhouse gas mitigation: 

exploring issues for heavy industry. OECD/IEA Paper. 

Baron, R. and Ellis, J. (2006) Sectoral crediting mechanisms for greenhouse 

gas mitigation: institutional and operational issues. OECD/IEA 

Paper, COM/ENV/EPOC/IEA/SLT(2006)4. 

Colombier, M. and Guerin, E. (2008) Sectoral Agreements, IDDRI. 

Ellis, J. and Baron, R. (2005) Sectoral Crediting Mechanisms: an initial 

assessment of electricity and aluminium, OECD/IEA Paper, COM/ENV/ 

EPOC/IEA/SLT(2005)8. 

Schmidt, J. et al. (2006) Sector-based approaches to the post-2012 

climate change policy architecture, Center for Clean Air Policy (CCAP), 

International Future Actions Dialogue, August 2006. 

Ward, M. (2008) Architecture of a Global Climate Change Agreement, 

GtripleC. 

Ward, M. et al. (2008) The role of sector no-lose targets in scaling up 

finance for climate change mitigation activities in developing countries, 

UK DEFRA. 

Ward, M., Garibaldi, J. et al. (2008) Policy instruments and approaches 

for scaling up investment in climate change mitigation activities – and 

their interface with the World Bank’s new Carbon Partnership Facility, 

World Bank Carbon Finance Unit. 

Murray Ward is a Principal of the Global Climate Change 

Consultancy,providing advice to a range of international and 

New Zealand public and private sector clients. He previously led 

the New Zealand Ministry for the Environment’s climate change 

team and is considered one of the key architects of the Kyoto 

framework’s land use, forestry and market trading mechanisms. 

Contact: murray.ward@paradise.net.nz 

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161 


162 


Francisco Avendaño 

First Climate Group 

Scaling Up Ghg Emission Reductions 

Through Replicable Business Models 

Abstract 

This article describes promising business models 

to boost GHG emission reductions and aid the 

maturity of carbon markets. It aims to show 

that climate change mitigation can benefit from 

importing business models that are readily available 

in other commodities markets. The business model 

selected to perform GHG mitigation can have 

deep consequences on the future value, scale and 

tradability of forward and liquid carbon assets. This 

article shows the need to bring in real secondary 

market instruments for both supply and demand 

actors. Through an analogy with other commodities 

and practices of origination, sourcing and trading, 

it points out that some of the ingredients to make 

carbon markets work are already in existence, 

while others require specific amendments to 

current rules and carbon registries practices. 

The critical success factor for any post-2012 

climate protection agreement, yet to be reached, 

will be its ability to catalyze a set of replicable 

business models that lead to much needed GHG 

emissions reductions, either as a core product or 

as a by-product. Although the final agreement 

will be the result of a complex process of 

negotiation among UNFCCC parties, every effort 

should be made to ensure that it will be effective 

in implementing both the command-control and 

incentives measures required to boost climateprotection 

activities on an unprecedented scale. 

This article describes business models that may 

be used to boost climate-protection activities in 

a post-2012 regime. 

To date, the main impact of the climate change 

agenda on the business community has been 

threefold: 

• Carbon has a price, thanks to a steady demand 

for GHG reductions and emission allowances 

163 


aised by a command-control approach 

through the legally binding commitments of 

Annex B Countries of the Kyoto Protocol and 

the EU-ETS and a growing supply developed 

through incentives mechanisms (CDM, JI). 

• Climate change is recognized as a novel 

factor that will modify insurance premiums 

for long-term operations and projects. 

• There is an awareness of possible climatechange 

impacts on food and energy security 

and the possible connections between 

biofuels and corn and sugarcane prices. 

The Kyoto process has led us through a learning 

curve regarding how to shape novel markets 

based on a discrete set of rules. To date, the 

most mature venue for reducing GHG emissions 

has been the Clean Development Mechanism 

(CDM). The future success of this mechanism 

or its successor depends on our ability to scale 

up its current applications. Current projections 

on future carbon credits point to 2Gt of CO2eq 

by 2012, and to scale this up requires a drastic 

reshaping of the mechanisms and the way we 

apply them. 

The paper is structured to present new ideas on 

how successful business practices from other 

markets can be designed for the carbon market 

in a post-2012 regime so as to achieve the desired 

scaling up of GHG reductions. Business practices 

found in other commodity markets are sketched 

and the modality of Programmatic CDM is 

introduced. Following this, the CDM Program 

of Activities is presented as an instrument with 

which secondary supply in the carbon market 

may be developed.. The paper concludes with 

some remarks and policy recommendations to 

enable implementation of the business models 

described here. 

Towards the maturity of carbon markets 

The post-2012 era will demand greater maturity 

and sophistication of the supply and demand sides 

of carbon markets. However, while the demand 

can be somewhat shaped by command-control 

measures, the supply side needs to be assisted 

by a considerable injection of capacity-building 

and by making both available and applicable 

instruments used in other commodity markets. 

Other commodity markets can be described as 

being composed of four elements (Figure 1). 

For example, the primary supply component in 

the market for orange juice is formed mostly 

by landowners or potential owners of orange 

plantations. The secondary supply is formed 

by wholesalers or aggregators, who facilitate, 

finance and monetize future orange-juice 

production in accordance with the terms set 

by secondary-demand actors such as food and 

beverage giants. Finally the readily available 

orange juice is inserted into logistic chains such 

as supermarkets, which make up the primary 

demand. 

Although carbon markets are quite young and 

have been progressing fast, serious efforts 

need to be undertaken to ensure that the four 

Figure 1. The basic structure of a mature commodity market 

Primary 

Supply 

Secondary 

Supply 

Secondary 

Demand 

Primary 

Demand 

164 


asic components of a commodity market are 

present. In their early stage, carbon markets were 

mostly dominated by the demand side through 

the pioneering activities of governmental 

procurement programs and multilateral efforts. 

This was followed by an increase in the number 

of carbon credit suppliers and capacity-building 

activities to strengthen institutional capabilities 

(e.g. DNAs) in non-Annex B parties. This now 

requires to be complemented by the development 

of secondary market actors on the supply side 

who can optimize the way carbon reductions 

are commissioned, traded and delivered, thus 

resembling actors with similar roles in other 

markets, such as wholesalers or aggregators in the 

case of the coffee or orange juice markets. The 

element of secondary supply is of fundamental 

importance because it promises to open up new 

and up to now unexplored ways of delivering 

carbon credits. 

Secondary supply in other 

commodity markets 

However, pointing to the need for wholesalers 

or aggregators is not enough: the instruments 

to make their activities possible also need 

to be provided. Let us examine the business 

model used by coffee aggregators. In this case, 

an aggregator or wholesaler devises a coffeesupply 

program according to the desired levels 

of homogeneity, standards and certification 

compliance established by the demand side. 

Before the implementation of these supply 

or sourcing programs, coffee production was 

generally scattered and atomized, and it was 

difficult to achieve homogeneity of quality. 

To illustrate how this situation was overcome, 

Figure 2 shows how this and other agricultural 

commodities with scattered production ranges 

are aggregated as futures. Here the aggregator or 

Figure 2. Secondary supply program with forward agricultural commodities 

Source; prepared by the author 

Scaling Up Ghg Emission Reductions Through Replicable Business Models 

165 


wholesaler intervenes in the design and project 

implementation terms to ensure full compliance 

with market requirements such as standards, 

delivery calendars and quality seals to enable 

trading of both forward and spot commodities. 

Using PoAs for secondary carbon supply 

Do we have a similar instrument for carbon 

markets or something that can be shaped in a 

similar way? Yes, and it is known as Programmatic 

CDM. In December 2005, at the first meeting 

of the parties to the Kyoto Protocol (MOP1), a 

new CDM modality was agreed: “programmes 

of activities” (PoAs). PoAs are intended to open 

the CDM market to replicable projects with low 

and physically scattered GHG emissions that 

would have been difficult and time-consuming 

to develop under the standard CDM model. 

Programmatic CDM seems to be well suited 

to energy efficiency, fossil-fuel switching and 

the use of renewable energies, particularly 

in private households, small enterprises and 

transportation. The specific rules for PoAs were 

developed by the CDM Executive Board (CDM 

EB), which also approved the templates for 

project-design documents for programmes of 

activities (PoADD) and its activities (CPADD), 

and issued procedures for registering PoAs 

and issuing CERs. The CDM EB also amended 

small-scale CDM methodologies to make them 

applicable to programmatic activities. 

In the past, groups of CDM projects were sometimes 

“bundled” to register them as one larger project 

or “bundling”. However, programmatic CDM has 

important differences. Bundling requires every 

single project to be identified and qualified 

before registration, while a programme can be 

registered at the concept level without specifying 

beforehand all its constituent activities but one. 

Bundling has had limited success in promoting 

the origination and grouping of small and 

dispersed projects. One of the reasons for this is 

Fig. 3. Risk profile for a bundling scheme 

Project 1 

Icdentification & 

Development 

Project 2 

Project n 

Common 

Fearures 

Bundling 

PDD 


Registry 

Regulatory 

risk 

Source: First Climate Group 

Time 

166 


the fact that the regulatory risk is only reduced 

after the bundled projects have been registered, 

which, as with standard CDM projects, happens 

only after money and effort have been poured 

into the development of every single project and 

the drafting of the PDD. 

Under the programmatic approach, regulatory 

risk is handled earlier in the process. Once a PoA 

has been registered based on a presentation of the 

concept and at least one real activity to the CDM 

Executive Board, enrolled PoA participants can 

embark on their individual activities with greater 

certainty that their action will be rewarded with 

CERs. 

Under PoAs, constituent Projects are validated 

and verified by relevant UN-accredited Designated 

Operational Entities (DoE’s), while monitoring 

is performed by a PoA Managing Entity. 

In the event of an individual activity (“CPA” in 

Programmatic CDM jargon) failing to comply 

with the registered PoA terms, the DoE reports 

this and the non-compliant activity is put aside. 

However, the other activities in the programme 

can continue. 

This feature is particularly relevant from the 

buyer’s perspective because the inclusion of PoAs 

in a portfolio offers a simple way of diversifying 

risk within a single type of project or technology. 

In addition, much of the complex management 

is outsourced to the managing entity, which is 

entitled to monitor the projects, trade CERs, 

distribute their benefits and represent all the 

programme members. 

To understand the advantages of a programmatic 

approach from the perspective of a project 

developer, consider an initiative to reduce GHG 

emissions in a given business sector. In many 

business sectors, there are different levels of 

maturity and willingness to join such an initiative. 

Under programmatic CDM early adopters can 

Fig. 4. Risk profile for a Programmatic scheme 

Icdentification & 

Development 

Program 

Concept 

(PoA-DD 

and 

a real CPA DD 


Registry 

CPA-DDs 

Regulatory 

risk 

Surce: First Climate Group 

Time 


167 


Box 1. 

Latest regulatory developments 

to October 2008 

• Programmes of Activities (PoAs) can 

be registered by presenting the programme 

concept (PoA Design Document) 

and at least one real activity ie 

a CDM Programme Activity (CPA). 

• As new activities are identified and 

developed they can later be enrolled 

according to the terms of the registered 

programme. 

• A PoA shall use only one approved 

baseline and monitoring methodology, 

and implement only one type of 

technology. 

• Since individual CPAs may lead, in 

some cases, to GHG reductions 

below the Small Scale threshold 

the CDM EB upgraded Small Scale 

Methodologies to render them 

applicable to PoAs. The upgrade 

included changes to account for 

leakage emissions associated with 

PoAs 

Box 2. 

Programmatic characteristics 

Programmatic activities under the CDM may 

have the following characteristics: 

• There are several project developers 

• The projects are developed in several 

places at the same time 

• Project activities don’t start necessarily 

at the same time 

• In some cases, at the moment the program 

is registered it is not possible to 

estimate the emission reductions or the 

size of the whole program 

• The project developers are not known at 

the time the program is registered. Only 

the Managing Entity is identified. 

• Maximum project duration of 28 years 

(60 for afforestation and reforestation 

projects) 

• Depending on the registered monitoring 

plan, the method or approach used 

to verify emission may include random 

sampling. 

Source: adapted from www.unfccc.int/cdm 

Source: adapted from www.unfccc.int/cdm 

join up, while slower movers can join in as it estab 

lishes itself. 

One of the main selling points in enrolling 

companies in a programme is that the individual 

project concept has been validated and that 

a large part of the regulatory risk has already 

been taken care of by the managing entity, which 

registers the programme before the enrolling 

process begins. 

In a similar way to buying a franchise, i.e. a 

registered business model that works, a company 

participating in a programme will be able to 

implement a validated project without distracting 

itself from its core business. In practice this 

means that, once the PoA is registered, the 

Managing Entity will provide the project concept 

and specific recipe to companies who want to 

undertake emission-reductions activities framed 

by such a programme. 

168 


Experience with managing entities of PoAs 

So far, opportunities for this novel way of creating 

carbon value have been arising in business 

sectors that encompass small- and medium-size 

enterprises (SMEs), are geographically and/or 

temporally dispersed, and have a large number 

of project owners among whom the number of 

committed PoA members is unknown. 

This is often the case in the developing world, 

where opportunities such as residential lighting, 

fuel-switching, upgrading or replacing small 

to medium-size boilers, small landfills, water 

treatment systems, small hydropower stations 

and reforestation programmes may proliferate 

thanks to programmatic CDM. 

PoAs are also seen as an opportunity to 

strengthen environmental reporting and 

governance in atomised business sectors. In 

developing economies, governments prioritise 

the allocation of their scarce environmental 

law enforcement budget on large-scale industry 

and natural resource extraction operations, 

leaving SMEs unmonitored. For instance, in 

most developing countries, small hydropower 

plants below a certain capacity (e.g. 10 MW) do 

not need to conduct an environmental impact 

assessment, but only present a statement and a 

brief environmental management plan, which will 

rarely be audited or followed up by government 

bureaus. 

Fig. 5. Secondary supply with forward CERs coming from PoAs. 

The business of coping with climate change has grown more rapidly than previous efforts in any environmental field and has 

served as a Trojan horse to intervene deeply into corporate agendas and boost participation in climate-neutral activities and 

voluntary carbon markets. 

Source: prepared by the author 


169 


However, if owners of small hydropower installations 

are enrolled in a PoA, the managing entity is 

entitled to monitor and report their environmental 

performance, safeguarding the compliance of 

PoA terms, which would include ecological issues, 

sound stakeholder relationships, applicable law 

compliance, and so on. 

Another issue to consider is that the project has 

to be evaluated from both the programme and 

the project-by-project perspectives. For example, 

Once the PoA is registered, the Managing 

Entity will provide the project concept 

and specific recipe to companies who 

want to undertake emission-reductions 

activities framed by such a programme. 

the PoA must indicate at registration the specific 

information to be provided (from each CPA) to 

ensure that leakage, additionality, establishment 

of the baseline, baseline emissions, eligibility 

and double counting are properly addressed by 

each CPA within the PoA. 

How can PoAs be used as instruments to bring 

maturity to carbon markets? In a similar way 

to the business model used by the coffee or 

orange juice sectors, Programmatic CDM would 

enable aggregators to act as the managing 

entities of a PoA. Through this modality, the 

aggregator or managing entity can ensure that 

the GHG reductions achieved by its constituent 

activities (CPAs) comply with the desired levels 

of homogeneity (same technology), standards 

(same baseline methodology) and certification 

(CDM registration), as well as intrinsic risk 

diversification, see Figure 5. 

Final remarks and policy recommendations 

To boost carbon supply (demand can be enhanced 

depending on the outcome of the Bali roadmap), 

primary demand needs to be aggregated 

through the use of more sophisticated means 

(e.g. PoAs) than simply visiting project owners 

and purchase/finance projects individually. An 

aggregator or wholesaler (e.g. PoA Managing 

Entity), a common actor in mature markets, 

has far greater opportunities to align actual 

supply with demand terms and conditions, 

including the provision of delivery guarantees, 

monetization of carbon contracts, financing 

in local terms (which enhances liquidity and 

collection possibilities in case of default) and 

local due-diligence practices according to the 

reality found frequently in companies operating 

in developing countries. It may be even possible, 

as in other commodity markets, to have several 

PoAs for the same technology and project type 

within the same physical areas, thus giving 

rise to healthy competition to offer the best 

combination of effectiveness, managing entity 

fees and PoA support. 

PoAs promise to play a major role in strengthening 

secondary carbon supply and carbon markets 

maturity in general. To facilitate this development, 

the following decisions need to be taken as part 

of the Bali roadmap: 

• A successor to the CDM should be defined. 

Post-2012 GHG reductions coming from 

project activities registered as CDM before 

31 December 2012 are eligible to be 

certified as tradable carbon credits usable or 

swappable by other types of carbon credits, 

thus giving rise to a truly global carbon 

credit commodity. 

• A global carbon credit registry should allow 

for transactions among permanent non- 

170 


Annex I accounts, thus producing a dynamic 

secondary market on the selling side. This will 

invite local and regional banks and domestic 

actors (technology-providers, business 

groups, etc.) to think and act seriously about 

carbon origination. 

• Eliminate the 1-km limit for neighbouring 

distance (see debundling tool at EB33 

Report Annex 21) between registered CPAs 

belonging to the same SSC PoA. The 1-km 

limit can be replaced for a multiphase plan 

presented before PoA implementation so that 

a distinction between “future” neighbouring 

CPAs and actual attempts to split a big 

project can be spotted without inhibiting 

the implementation of efficient lighting and 

energy efficiency PoAs for the residential and 

commercial sectors and other project types. 

• The pros and cons of having a price 

regulation mechanism (e.g. a carbon central 

bank to bring equilibrium to the CER/EUA 

and other carbon credit types “exchange 

rates”) should be considered. 

Furthermore, the private sector should be able 

to: 

• Improve the capitalization of GHG reductions 

obtained by day-to-day capital management 

in non-Annex B countries. For example, two 

multilateral financial institutions injected 

capital into two different instruments: a 

domestic credit line for energy efficiency 

and GHG reductions; and a fund to finance 

low-emission electricity projects. The first 

initiative was simply coupled with the 

practices and contracting structures of the 

domestic bank that was used to allocate 

the loans. The loans were quickly allocated, 

but the bank failed to capitalize on GHG 

reductions of loan receivers, thus leaving 

them on their own in terms of carbon 

development support. If local and regional 

The critical success factor for any post- 

2012 climate protection agreement, yet to 

be reached, will be its ability to catalyze a 

set of replicable business models that lead 

to much needed GHG emissions reductions, 

either as a core product or as a by-product. 

banks were to be properly equipped to 

capitalize on GHG reductions, this failure 

would not happen again. The second 

initiative proved to be very fruitful where 

the operator assembled a sound portfolio 

of clean electricity projects across a region, 

capitalizing not only on GHG reductions 

but also increasing the market value of the 

portfolio holder as a whole. Opportunities 

like this have been identified by the main 

global electricity suppliers who now value 

not only having supply capacity, but also 

a good share of clean electricity installed 

capacity. 

• PoAs should be used as carbon credit supply 

tools or as secondary supply or sourcing tools. 

Future supply can be boosted if aggregators 

or wholesalers intervene at an early stage 

in enrolling projects or companies in CDM 

programmes (PoAs). 

Francisco Avendaño has worked extensively in the USA, EU and 

Latin America on energy, commodities markets, and climate change, 

including professional posts with Shell International, the Peruvian 

DNA, and the International Emissions Trading Association (IETA). 

Contact: francisco.avendano@firstclimate.com 


171 


172 


Marcelo Theoto Rocha 

University of Sao Paulo 

LULUCF under CDM: 

Is there a role or even a future 

in the post-2012 regime? 

Abstract: 

The post-2012 climate regime is under negotiation. 

Until now afforestation and reforestation project 

activities have enjoyed extremely low participation 

in the carbon market. The principal reasons 

are that they are not accepted in the EU-ETS 

and that they generate only temporary credits. 

The future of these project activities in the 

post-2012 regime is unclear, as are the role and 

financing mechanisms for reducing emissions from 

deforestation and forest degradation (REDD). 

The aim of this paper is to explain the current 

role of LULUCF and the limitations in the CDM 

and offer some ideas for possible improvements. 

The Kyoto Protocol of the United Nations 

Framework Convention on Climate Change 

(UNFCCC) allows developed countries with 

greenhouse gas (GHG) reduction commitments 

to buy certified emissions reductions (CERs) to 

meet their targets. The CERs are to be generated 

through project activities under the Clean 

Development Mechanism (CDM), as defined in 

Article 12 of the Kyoto Protocol. Different types 

of project activity may be developed under the 

CDM, including land use, land-use change and 

forestry (LULUCF). 

According to the current rules of the CDM for 

the first commitment period 2008-2012, only 

afforestation and reforestation (A/R) project 

activities are eligible under all potential LULUCF 

activities. These kinds of project enjoy extremely 

low demand among buyers in the carbon 

market. In order to increase the number of A/R 

173 


projects in the carbon market and to explore 

the potential of other LULUCF activities, such 

as reducing emissions from deforestation and 

forest degradation (REDD), it is necessary to 

revise the current modalities and procedures. 

The main aim of this paper is to offer some “food 

for thought” to help negotiate LULUCF ‘s role in 

the post-2012 regime. 

Until now afforestation and reforestation 

project activities have enjoyed extremely 

low participation in the carbon market; 

the principal reasons are that they are 

not accepted in the EU-ETS and that 

they generate only temporary credits. 

Specifically, the aims of this paper are to explain 

the genesis of the current rules related to A/R 

CDM projects activities; identify the main 

reasons for the low participation of A/R CDM 

projects activities in the carbon market; propose 

modifications to the current A/R rules for the 

post-2012 climate regime; and discuss the 

potential for including project activities related 

to REDD in the CDM under the post-2012 climate 

regime. 

For this purpose, the paper is divided into the 

following sections: the present introduction; the 

history of LULUCF negotiations under the Kyoto 

Protocol; the experience gained from current 

projects and methodologies; proposals for 

improvements to the current rules; the particular 

case of reducing emissions from deforestation and 

forest degradation (REDD); and conclusions. 

The history of LULUCF negotiations 

under the Kyoto Protocol 

In 2003, at the 9 th Conference of the Parties 

(COP 9) to the UNFCCC, delegates from different 

countries worked hard to finish discussions and 

to agree on the “modalities and procedures for 

A/R project activities under the CDM in the 

first commitment period of the Kyoto Protocol” 

(Decision 19/CP.9). 1 

The negotiations started just after the conclusion 

of the Marrakesh Accords (agreed in 2001 at 

COP 7), and had as their main guide the decision 

related to LULUCF (Decision 11/CP.7) 2 and the 

modalities and procedures for CDM (Decision 

17/CP.7). 3 

To guarantee the environmental integrity of the 

Kyoto Protocol, Decision 11/CP.7 affirms that 

the treatment of LULUCF activities must be 

governed by certain principles (see Box 1). The 

principles should be applied in all commitment 

periods of the Kyoto Protocol and have the aim 

of guaranteeing that the removals obtained 

through LULUCF activities are real, measurable 

and verifiable. Special attention should be given 

to principle g: “That reversal of any removal due to 

land use, land-use change and forestry activities 

be accounted for at the appropriate point in time”. 

Because of this principle, the removals from A/R 

project activities were considered temporary in 

the development of the current A/R CDM rules. 

Decision 11/CP.7 also adopted definitions, modal 

ities, rules and guidelines relating to LULUCF 

1 After Kyoto Protocol entered into force, became Decision 5/CMP.1 ( 

http://cdm.unfccc.int/Reference/COPMOP/08a01.pdf#page=61) 


http://unfccc.int/resource/docs/2005/cmp1/eng/08a03.pdf#page=3) 


http://cdm.unfccc.int/Reference/COPMOP/08a01.pdf#page=6) 

174 


activities, for application in the first commitment 

period. It is important to highlight that the 

decision was agreed only for the first commitment 

period, because of which it is possible to revise 

the content of such decisions in the negotiations 

over the post-2012 climate regime. The decision 

clearly states that: “The treatment of LULUCF 

project activities under Article 12 in future 

commitment periods shall be decided as part 

of the negotiations on the second commitment 

period”. 

For the CDM, Decision 11/CP.7 limited the eligibility 

of LULUCF project activities to afforestation 

and reforestation. In both cases, project 

proponents need to encourage the conversion 

of land without forest to forested land through 

planting, seeding and/or the human-induced 

promotion of natural seed sources. The only 

difference between afforestation and reforestation 

is the period of time during which the project 

proponent needs to check the “non-forest status” 

of the land. For afforestation no forest must have 

grown on the land for a period of at least fifty 

years. For reforestation projects, the proponent 

need only check the status of the land as of 31 

December 1989. 

The possibility of including REDD in the CDM 

was therefore excluded for the first commitment 

period (see further discussions on REDD in the 

section below). 

Decision 11/CP.7 also established that: “the 

total of additions to a Party’s assigned amount 

resulting from eligible LULUCF project activities 

under the CDM shall not exceed one per cent of 

base year emissions of that Party, times five”. This 

means that there is a limit to the amount of CERs 

from A/R CDM project activities that a developed 

country can use to meet its target. According to 

BOX 1. 

Principles related to LULUCF 

adopted in Decision 11 CP.7 

a. That the treatment of these activities 

be based on sound science; 

b. That consistent methodologies be 

used over time for the estimation 

and reporting of these activities; 

c. That the aim stated in Article 3, 

paragraph 1, of the Kyoto Protocol 

not be changed by accounting for 

land use, land-use change and forestry 

activities; 

d. That the mere presence of carbon 

stocks be excluded from accounting; 

e. That the implementation of land use, 

land-use change and forestry activities 

contributes to the conservation 

of biodiversity and sustainable use of 

natural resources; 

f. That accounting for land use, landuse 

change and forestry does not 

imply a transfer of commitments to a 

future commitment period; 

g. That reversal of any removal due 

to land use, land-use change and 

forestry activities be accounted for 

at the appropriate point in time; and, 

h. That accounting excludes removals 

resulting from: 

(i) elevated carbon dioxide concentrations 

above their pre-industrial 

level; 

(ii) indirect nitrogen deposition; and 

(iii) the dynamic effects of age 

structure resulting from activities and 

practices before the reference year. 

Is there a role or even a future in the post-2012 regime? 

175 


Bernoux et al. (2002), 4 the market size for A/R 

CDM carbon credits would only be about 110 Mt 

CO 2 

for the first commitment period of the Kyoto 

Protocol. 

While Decision 11/CP.7 laid down the principles, 

definitions and limits for inclusion of LULUCF 

activities under the CDM, decision 17/CP.7 

provided a “legal structure”, i.e. the headings and a 

first negotiating text on the basis of which delegates 

negotiated the specific modalities and procedures 

for A/R project activities under the CDM. 

During the negotiations, many countries had 

strong reservations, in some cases even raising 

objections, to LULUCF project activities. Deep 

differences appeared on many aspects, such as 

the date for the definition of reforestation and 

how to treat the non-permanence of the removals 

from the forestry (principle g of Decision 11/ 

CP7). As a result conclusions were delayed until 

2003 at COP 9, where the Parties agreed on the 

modalities and procedures regarding A/R CDM 

project activities (Decision 19/CP.9). 

Because of such divergences, it is important to 

recall that Decision19/CP.9 also decided: 5 

and 

that the treatment of LULUCF project activities 

under the CDM in future commitment periods 

shall be decided as part of the negotiations on 

the second commitment period and that any revision 

of the decision shall not affect A/R project 

activities under the CDM registered prior to the 

end of the first commitment period; 

to periodically review the modalities and procedures 

for A/R project activities under the 

CDM, and that the first review shall be 

carried out no later than one year before 

the end of the first commitment period, 

based on recommendations by the Executive 

Board of the CDM and by the Subsidiary 

Body for Implementation, drawing on 

technical advice from the Subsidiary Body 

for Scientific and Technological Advice, as 

needed. 

These passages clearly give a legal mandate 

to try and improve the current rules. These 

improvements are necessary since few A/R CDM 

project activities are being proposed. They also 

represent a “political will” that existed in 2003 

but may now be lost in the negotiations for a 

post-2012 climate regime. 

The experience learned from current 

projects and methodologies 

According to the UNEP Risø Centre, 6 on 1 

September 2008 there were 3,819 CDM project 

activities in the pipeline. Of this total, only five 

project activities relate to afforestation and 22 

to reforestation. This represents only 0.13% and 

0.58% respectively of the projects in the pipeline 

and, in terms of potential 2012 CERs, only 0.07% 

and 0.43% respectively. 

The extreme low participation of A/R CDM 

project activities in the carbon market cannot be 

explained by the lack of methodologies as in the 

past. At the time of writing, fourteen baseline and 

monitoring methodologies had been approved 

by the Executive Board. 7 This means that project 

4 Bernoux, M.; Eschenbrenner, V.; Cerri, C.C.; Melillo, J.M.; Feller, C. 

LULUCF-based CDM: too much ado for... a small carbon market. 

Climate Policy 2 (2002) 379–385. 

5 See http://cdm.unfccc.int/Reference/COPMOP/08a01. 

pdf#page=61 paragraph 3 and 4. 

6 UNEP Risoe CDM/JI Pipeline Analysis and Database, September 1st 

2008 - http://www.cdmpipeline.org/publications/CDMpipeline.xls 

7 http://cdm.unfccc.int/methodologies/ARmethodologies/index.html 

176 


proponents have fourteen different methodologies 

to determine and estimate the baseline 8 and the 

“net anthropogenic greenhouse gas removals by 

sinks”. 9 Probably around 80% of all potential A/R 

project activities under the CDM are covered by 

the approved methodologies. 

Different reasons explain the extremely low 

participation of A/R CDM project activities in 

the carbon market. In order of importance, the 

main reasons are: 

1. No acceptance under the EU ETS (European 

Union Emission Trade Scheme): 

the European Union does not buy CERs 

from A/R CDM to comply with its emission 

reductions targets, with the arguments 

that: 10 

• “LULUCF projects cannot physically 

deliver permanent emissions 

reductions. Insufficient solutions 

have been developed to deal with 

the uncertainties, non-permanence 

of carbon storage and potential 

emissions ‘leakage’ problems arising 

from such projects. The temporary 

and reversible nature of such activities 

would pose considerable risks in a 

company-based trading system and 

impose great liability risks on Member 

States; 

8 The baseline scenario for an A/R CDM project activity is the 

scenario that reasonably represents the sum of the changes in carbon 

stocks in the carbon pools within the project boundary that would have 

occurred in the absence of the proposed project activity (http://cdm. 

unfccc.int/Reference/Guidclarif/glos_CDM_v04.pdf) 

9 Defined as ’the actual net GHG removals by sinks minus the baseline 

net GHG removals by sinks minus leakage’ http://cdm.unfccc.int/Reference/Guidclarif/glos_CDM_v04.pdf 

10 Questions and Answers on the Commission’s proposal to revise 

the EU Emissions Trading System - MEMO/08/35 (23/01/2008). 

Available at: http://europa.eu/rapid/pressReleasesAction. 

do?reference=MEMO/08/35 

• The inclusion of LULUCF projects in 

the ETS would require a quality of 

monitoring and reporting comparable 

to the monitoring and reporting of 

emissions from installations currently 

There are high expectations concerning 

the positive incentives that could come 

from REDD, especially in countries 

that see REDD as the only profitable 

way to enter the “carbon market”. 

covered by the system. This is not 

available at present and is likely to 

incur costs which would substantially 

reduce the attractiveness of including 

such projects. 

• The simplicity, transparency and 

predictability of the ETS would be 

considerably reduced. Moreover, the 

sheer quantity of potential credits 

entering the system could undermine 

the functioning of the carbon market 

unless their role were limited, in 

which case their potential benefits 

would become marginal.” 11 

2. Temporary credits: In order to take into 

consideration one of the main concerns 

of Parties, namely the potential non-permanence 

of the forest (principle g of Decision 

11/CP.7), decision 19/CP.9, introducing 

temporary credits for A/R CDM project 

activities, was adopted. There are two types 

of temporary credit: i) “Temporary CER” 

11 Questions and Answers on the Commission’s proposal to revise the 

EU Emissions Trading System (MEMO/08/35) – available at: http:// 

ec.europa.eu/environment/climat/emission/ets_post2012_en.htm 


177 


(tCER), which expires at the end of the 

commitment period following the one 

during which it was issued. For example, a 

tCER issued in 2007 will expire at the end 

of the first commitment period, e.g. 31 December 

2012; ii) “Long-term CER” (lCER), 

which expires at the end of the crediting 

period of the A/R CDM project activity. For 

example, if an lCER is issued in 2007 and 

the A/R CDM project activity has a crediting 

period of 30 years, the lCER will 

expire in 2037. In this sense, the temporary 

credits from A/R CDM project activities 

can be considered a “rent”, where the 

project proponent undertakes the obligation 

to remove and retain a certain quantity 

of CO 2 

during a specific period of time. 

At the end of the rent contract, the project 

proponent is free to release the CO 2 

(cut 

the forest), and the buyer must replace the 

credit. 

3. Complexity and cost of the approved 

baseline and monitoring methodologies: 

One of the main complaints of project developers 

is that the A/R methodologies are, 

in most cases, relatively more complex and 

costly than non-A/R methodologies. 

4. Limits on the use of tCERs or lCERS: 

As already pointed out ,the total amount 

of carbon credits from A/R CDM project 

activities that can be used by developed 

countries to meet their emission reduction 

target under the first commitment period 

of the Kyoto Protocol is limited. For other 

reasons, nowadays even the limit is not 

achieved. 

Proposals for improvements 

to the current rules 

Among the reasons cited above, reason 3 (and 

the monitoring quality raised by the EU) could be 

dealt with in the context of the Afforestation and 

Reforestation Working Group (AR-WG) under 

the CDM Executive Board (EB). The AR-WG was 

established to draw up, among other things: 

recommendations on options for expanding the 

applicability of methodologies for CDM A/R 

project activities, if applicable, and develop tools 

to facilitate the selection of one approved methodology 

from among those of a similar nature by 

project participants. 12 

The work of the group is similar to the 

Methodologies Panel (Meth Panel). 

In this sense, the consolidation process started 

with methodology AR-ACM0001 is very welcome. 13 

Further consolidations could be used to simplify 

the methodologies, taking into consideration, of 

course, the environmental integrity of the Kyoto 

Protocol. A deeper look at the methodologies 

from non-forestry project activities might inspire 

the process. Also, the development of tools could 

represent a powerful simplification, especially 

if they could be accompanied by user-friendly 

software. Of course, if AR-WG is guided only by 

an “academic spirit “, consolidation and tools 

could have the opposite effect of simplification 

by creating methodologies that are more complex 

and costly. 

12 Terms of reference for the afforestation and reforestation working 

group (EB23, Annex14) 

13 Afforestation and reforestation of degraded land - Version 1 (http:// 

cdm.unfccc.int/UserManagement/FileStorage/CDM_ACMMEBS- 

DU565IKTQC14YSI0WK3BVUYN02) 

178 


However, the most important reasons (1 and 

2) for the low participation of AR CDM project 

activities in the carbon market can only be solved 

by political decisions. 

According to the directive proposal for EU ETS 

Phase III 14 (2012 to 2020), A/R CDM project 

activities will still be banned. The EU needs to 

revise its reasons for not accepting A/R CDM 

project activities and even propose different ways 

to deal with the issue of non-permanence. 

In the UNFCCC context, the recent conclusions 

of the Ad Hoc Working Group on Further 

Commitments for Annex I Parties under the Kyoto 

Protocol (AWG-KP) 15 acknowledged that further 

discussions on LULUCF should take into account 

the principles established by decision 11/CP.7. In 

relation to the project-based mechanisms there 

are two possible approaches: 

(a) Make a few changes in the current rules, meaning 

that only the legally required changes will be made 

to the current modalities and procedures (the 

same rules will apply mutatis mutandis for post- 

2012, and only the reference to the first commitment 

period will be deleted from the rules); 

(b) Make more changes to current rules, meaning that 

non-permanence, leakage, measurements, definitions 

and others elements could be revisited as 

necessary. 

In both arenas (EU ETS and UNFCCC), first of 

all, there is a need for “political will” to make 

real revisions and possible improvements to the 

current modalities and procedures. “Political 

will” in this context means that countries need to 

14 http://ec.europa.eu/environment/climat/emission/ets_post2012_ 

en.htm 

15 For example: FCCC/KP/AWG/2008/L.5 - http://unfccc.int/resource/docs/2008/awg5/eng/l05.pdf 

agree that LULUCF project activities can or should 

play a bigger role in the post-2012 regime. Some of 

the limitations that project activities may have (e.g. 

non-permanence and monitoring costs) could be 

solved by a real learning-by-doing approach or by 

being treated differently in specific situations, even if 

they produce losses in “simplicity, transparency 

and predictability”. Also, there is always the 

possibility to define acceptable losses in 

“simplicity, transparency and predictability”. 

If the temporary credits solution remains 

in the post-2012 regime and will also be 

applied to REDD credits, then probably 

the demand for LULUCF CDM project 

activities will remain extremely low, being 

incapable of raising the amount of financial 

resources needed to make LULUCF a real 

contribution to climate-change mitigation. 

During the process of agreeing Decision 19/CP.9 

(2003), there was a “political will” that predicted 

the revision of the modalities and procedures 

(see quote above) after experiences were made. 

Unfortunately, the current modalities and 

procedures did not create the necessary number 

of projects to make up a diverse, concrete and 

real experience. In other non-forest cases, the 

improvements were only possible due to experience 

learned from concrete projects (e.g. monitoring of 

CH4 emissions in manure management projects 

and landfill ex-ante estimates). 

Now, in the current discussions on the role of 

LULUCF post-2012, especially in the AWG-KP, it 

seems that some Parties do not have the strong 

political will needed to discuss the issue further. 


179 


If parties really want to create more space for 

LULUCF projects in the post-2012 regime, 

it is necessary to demonstrate some trust in 

these kinds of project and to explore new ideas 

regarding the challenges and, if necessary, pay 

the costs of developing such ideas. 

With regard to non-permanence, one new idea 

to be explored further is to establish some kind 

of forest (native forest without any commercial 

exploration) in countries with a legal and enforceable 

framework for forest protection. The 

forest could be subjected to low-cost monitoring 

procedures after the final verification with the 

aim of extending permanence beyond the current 

time limit imposed by the temporary credits. 

After the end of the crediting period, the carbon 

credits created remain valid as long as the project 

proponent demonstrates evidence that the forest 

remains on the ground. Such evidence could be 

limited to satellite images or photographs every 

five years, after the last verification. It would not 

require further carbon stock measurements after 

the last verification, assuming that the forest 

does not enter in a process of degradation after 

establishment. 

Other ideas to deal with the non-permanence 

issue include the establishment of buffer zones 

that could serve as a form of insurance, and host 

countries assuming the liability of the “reversal 

of any removal”. All of them could have high cost. 

It is important to emphasize that the technical 

debates should be started without the “political 

will” and will probably repeat discussions and 

conclusions from 2003, i.e. the “temporary 

credits”. Finally, caps (as explained in reason 4) 

could still be used in order to accommodate 

concerns regarding environmental integrity. 

BOX 2. 

Indicative guidance for REDD 

demonstration activities 

1. Demonstration activities should be undertaken 

with the approval of the host Party. 

2. Estimates of reductions or increases in emissions 

should be results-based, demonstrable, 

transparent, verifiable, and estimated 

consistently over time. 

3. The use of the methodologies (Good 

Practice Guidance for Land Use, Land-Use 

Change and Forestry) is encouraged as a 

basis for estimating and monitoring emissions. 

4. Emission reductions from national demonstration 

activities should be assessed on the 

basis of national emissions from deforestation 

and forest degradation. 

5. Subnational demonstration activities should 

be assessed within the boundary used for 

the demonstration, and assessed for associated 

displacement of emissions. 

6. Reductions in emissions or increases resulting 

from the demonstration activity should 

be based on historical emissions, taking into 

account national circumstances. 

7. Subnational approaches, where applied, 

should constitute a step towards the development 

of national approaches, reference 

levels and estimates. 

8. Demonstration activities should be consistent 

with sustainable forest management, 

noting, inter alia, the relevant provisions 

of the United Nations Forum on Forests, 

the United Nations Convention to Combat 

Desertification and the Convention on 

Biological Diversity. 

9. Experiences in implementing activities 

should be reported and made available via 

the Web platform 

10. Reporting on demonstration activities 

should include a description of the activities 

and their effectiveness, and may include 

other information. 

11. 

Independent expert review is encouraged. 

180 


The particular case of REDD 

Reducing emissions from deforestation and forest 

degradation (REDD) is becoming more attractive 

than afforestation and reforestation, at least in 

the negotiations. There are high expectations 

from various countries about the outcome of the 

negotiations. The negotations re-started in 2005, 

when the Government of Papua New Guinea by 

its communication dated 28 July 2005, requested 

the secretariat to add an item titled ‘Reducing 

emissions from deforestation in developing 

countries: approaches to stimulate action’ to 

the provisional agenda of the Conference of the 

Parties at its eleventh session. 

After the initial submission from Papua New 

Guinea and Costa Rica, 16 many other submissions 

were made, workshops were held, and a decision 

was taken in Bali in the context of the “Road 

Map” 17 . The main element in that decision is the 

possibility of Parties to undertake “demonstration 

activities” following indicative guidance (see Box 

2). 

Countries are working on the development of 

these demonstration activities, especially with 

the help of the Forest Carbon Partnership 

Facility from the World Bank. 

The new Forest Carbon Partnership Facility is designed 

to set the stage for a large-scale system 

of incentives for reducing emissions from deforestation 

and forest degradation, providing a fresh 

source of financing for the sustainable use of 

forest resources and biodiversity conservation.... 

The Forest Carbon Partnership Facility will build 

the capacity of developing countries in tropical 

and subtropical regions to reduce emissions from 

deforestation and forest degradation and to tap 

into any future system of positive incentives for 

REDD. In some of these countries, the FCPF will 

also help reduce the rate of deforestation and forest 

degradation by providing an incentive per ton 

of carbon dioxide of emissions reduced through 

specific Emission Reductions Programs targeting 

the drivers of deforestation and forest degradation. 

18 

As pointed out before, there are high expectations 

concerning the positive incentives that could 

come from REDD, especially in countries that 

see REDD as the only profitable way to enter 

the “carbon market”. Some caution is needed, 

however, since, even if REDD becomes eligible 

under the CDM in the post-2012 regime (and 

nowadays there is no guarantee that this will 

happen), the same constraints that apply to A/R 

(e.g. temporary credits) could apply to REDD. 

As a result, the demand for REDD credits could 

be extremely limited, with no effective result in 

reducing deforestation and no effective payments. 

In this sense, discussing the inclusion of REDD 

in the CDM without solving the problem of nonpermanence 

seems irrelevant. 

Besides the results of the negotiation 

process, there are many challenges 

that countries must overcome 

in order to achieve REDD: 

1. Coordination: because of the complexity of 

REDD, many and different actors must be 

involved in the different phases. All countries 

find coordination among all these different 

actors to be one of the biggest challenges; 

16 http://unfccc.int/resource/docs/2005/cop11/eng/misc01.pdf 

17 http://unfccc.int/resource/docs/2007/cop13/eng/06a01. 

pdf#page=8 

18 http://carbonfinance.org/fcpfhttp://carbonfinance.org/fcpf http:// 

carbonfinance.org/fcpf 


181 


2. International leakage: in certain situations, 

there is a large potential of leakage over 

countries’ borders; 

3. Opportunity costs: because of the characteristics 

of some of the main drivers for 

deforestation and degradation, some opportunity 

costs could be very difficult to 

determine and to compete with them. In 

this case, countries could combine carbon 

revenues with other financial resources 

(e.g. over-pricing due to agriculture certification) 

and have a close dialogue with the 

private sector; 

4. Institutional arrangements for deforestation 

and degradation: some drivers of deforestation 

and/or degradation have such complex, 

articulated and strong institutional 

arrangements (based on a triangular division 

of actors) that REDD will demand deep 

and painful modifications going far beyond 

“payments for environmental service”. This 

will be especially the case if these payments 

are intended to benefit primarily communities 

and do not benefit the intermediary 

actors present at the institutional arrangements. 

These intermediary actors could be 

those that will manipulate the communities, 

but they will also be used by the top 

actors to maintain the status quo; 

At the same time, there are many 

opportunities that countries could 

explore in achieving REDD: 

1. Sharing: exchanging information and 

knowledge between all countries and relevant 

organizations and stakeholders. This 

could include a web platform, seminars and 

workshops, peer-to-peer meetings, reports 

and publications, etc. 

2. Non-forest approach: because of the characteristics 

of some of the main drivers for 

deforestation and degradation, the main 

potential solutions could lie outside the 

forest sector. This imposes great challenges, 

since the opportunity costs could be 

much higher, and coordination with nonforest 

organizations and/or non-forest governmental 

bodies more complex; 

3. Reducing emissions beyond REDD: some of the 

main opportunities for particular countries 

could be outside reducing deforestation 

and/or degradation (e.g. conversation 

and enhancement of carbon stocks); 

4. Regional approach: this is definitely something 

to explore, taking into consideration 

not only the potential benefits, but also the 

technical and political consequences. 

Conclusions 

There is definitely a mandate and a need to 

revise the current modalities and procedures 

for LULUCF project activities under the CDM. It 

is not clear whether Parties have the “political 

will” to do this at the level necessary to produce 

concrete and consistent results. Political will is 

the main element necessary to decide what kind 

of modifications will be applied to A/R and REDD 

in the post-2012 climate-change regime. 

Unfortunately there are not many LULUCF 

activities that can benefit from the “learning by 

doing” approach. In the non-A/R context, many 

of the revisions for the post-2012 regime could 

be based on concrete experience and cases. 

Besides this limitation, there is no reason to give 

up on forestry project activities in the post-2012 

regime. It is unnecessary to explain that reducing 

emissions from LULUCF is an important part 

of the achievement of the UNFCCC objective. 

182 


Also, it is not necessary to choose between A/R 

and REDD. In fact, in some cases they must be 

implemented together. They could also have 

different sources of financing: A/R through 

carbon credits and REDD through funds. 

One common element between A/R and REDD 

is the treatment of non-permanence. If the 

temporary credits solution remains in the post- 

2012 regime and will also be applied to REDD 

credits, then probably the demand for LULUCF 

CDM project activities will remain extremely 

low, being incapable of raising the amount of 

financial resources needed to make LULUCF a 

real contribution to climate-change mitigation. 

The main focus of the discussion should be to find 

alternative ways to deal with the non-permanence 

issue. Without an alternative approach, inclusion 

of REDD in the CDM could become irrelevant. 

Marcelo Theoto Rocha is a researcher in applied economics 

at University of Sao Paulo (CEPEA – ESALQ/USP) 

and member of the Afforestation/Reforestation Working 

Group of the CDM Executive Board, the Brazilian Delegation 

at UNFCCC, and the World Bank Forest Carbon 

Partnership Facility (FCPF) Technical Advisory Panel (TAP). 

Contact: matrocha@terra.com.br 

Because of the complexity of the problem of 

climate change, including the negotiation process, 

possible improvements in the A/R modalities and 

procedures, and especially decisions concerning 

REDD, cannot be treated in isolation. They will 

influence and be influenced by other items of 

the negotiation agenda. 

Adopting an analogy made by an expert on the 

carbon market in the last Carbon Expo regarding 

the actual stage of non-A/R CDM project 

activities: “The low hanging fruits are gone, we 

need to start planting new fruit trees”. In the 

case of the forestry projects, it is not possible 

to say that until now almost no fruit has been 

collected because the decisions taken in the past 

have created a very low demand for this kind of 

fruit. For the post-2012 regime, it is necessary to 

make the “forestry fruit” more attractive in order 

to harvest some of these fruits and in fact plant 

some trees. 


183 


The annual CD4CDM Perspectives Series features a topic of pivotal importance 

to the global carbon market. The series seeks to communicate the diverse 

insights and visions of leading actors in the carbon market to better inform the 

decisions of professionals and policymakers in developing countries. The second theme 

of the series focuses on how the CDM can be reformed in a post-2012 climate regime, 

including new mechanism for sustainable development. Seventeen contributors from 

the private sector, Designated National Authorities, the Executive Board, research, 

and development agencies present their perspective on meeting challenges such as the 

unequal regional distribution of CDM projects, concerns about environmental integrity 

and technology transfer, complex governance procedures, and questions about the 

CDM’s contribution to sustainable development. The new ideas and solutions to these 

challenges proposed by the authors in this edition of Perspectives have 

been solicited to help professionals and policy makers make the best 

decisions in the lead-up to COP 15 in Copenhagen and beyond.

A Reformed CDM including new Mechanisms for - CD4CDM

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